Question

Venus Creations sells window treatments (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year. Revenues Direct materials costs Direct labor costs Overhead costs Operating income (loss) Commercial $331,000 $30,000 140,000 91,000 261,000 $70,000 Residential $456,000 $50,000 260,000 176,000 486,000 $(30,000) The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed: Activity Cost Pools Scheduling and travel Setup time Supervision Estimated Overhead $91,000 96,000 80,000 Cost Drivers Hours of travel Number of setups Direct labor cost Estimated Use of Cost Drivers per Product Commercial Residential Scheduling and travel 750 550 Setup time 550 250

Answer 1

Overhead cost assigned = Overhead rate*Driver consumed
	Commercial	Residential
Scheduling and Travel	52,500	38,500
Setup Time	66,000	30,000
Supervision	28,000	52,000
Total cost assigned	146,500	120,500
Calculation of Operating Income
	Commercial	Residential
Revenues	331,000	456,000
Direct material	30,000	50,000
Direct labor	140,000	260,000
Overhead costs	146,500	120,500
Operating Income	14,500	25,500

B C Commercial =70*750 =550*120 Residential = 70*550 =250*120 =0.2*260000 =SUM(C3:05) =0.2*140000 =SUM(B3:B5) A 1 Overhead cost assigned = Overhead rate* Driver consumed 2 3 Scheduling and Travel 4 Setup Time 5 Supervision 6 Total cost assigned 7 8 Calculation of Operating Income 9 10 Revenues 11 Direct material 12 Direct labor 13 Overhead costs 14 Operating Income Commercial Residential 331000 456000 30000 50000 140000 260000 =B6 =C6 =B10-SUM(B11:B13) =C10-SUM(C11:C13)