Question

Elite Lawn & Plowing (EL&P) is a lawn and snow plowing service with both residential and commercial clients. The owner believes that the commercial sector has more growth opportunities and is considering dropping the residential service.
Twenty employees worked a total of 20,000 hours last year, 13,000 on residential jobs and 7,000 on commercial jobs. Wages were $25 per hour for all work done. Any materials used are included in overhead as supplies. All overhead is allocated on the basis of labor-hours worked, which is also the basis for customer charges. Because of increased competition for commercial accounts, EL&P can charge $60 per hour for residential work, but only $45 per hour for commercial work.

Required:

a. If overhead for the year was $205,000, what were the profits of the residential and commercial services using labor-hours as the allocation base?

b. Overhead consists of costs of traveling to the site, using equipment (including vehicle rental), and using supplies, which can be traced as follows.

					Cost Driver Volume
Activity	Cost Driver	Cost			Commercial			Residential
Traveling	Number of clients served	$	25,000			24			76
Using equipment	Equipment hours		60,000			1,775			1,225
Using supplies	Area serviced in square yards		120,000			65,000			35,000
Total overhead		$	205,000

Recalculate profits for commercial and residential services based on these activity bases. (Round intermediate calculations to 2 decimal places.)

Commercial & Residential

a. Revenue

Direct Labor

Overhead

Profit

b. Total Overhead

Profit

Answer 1

a Overhead Rate and profit using Dirct Labor Hour Divide Estimated Overhead Estimated Direct Labor hour Overhead rate 205,000 20,000 10.25 Per DLH Calculations of profit using labor hour allocation Less Less Revenue Direct Labor Overhead cost Profit Commercial 315,000 175,000 71,750 68,250 $ $ $ $ Residential 780,000 325,000 133,250 321,750 $ Revenue = Number of Hour x Charge per hour 7000 x 45 =315000 Direct Labor = Number of hr x Wages per hr 7000 x 25 = 175000 Overhead = Number of hr x Overhead rate 7000 x 10.25=71750 13000 x 60 = 780000 13000 x 25 = 325000 13000 x 10.25 = 133250 Calculate Activity Rate (A) (B) Expected use of cost driver (A)/(B) Activity based overhead rate Activity cost pool Estimated Overhead Traveling Using equipment using Supplies 25,000 60,000 120,000 205,000 100 3,000 100,000 $ $ $ 250.00 Per client served 20.00 Per equipment hr 1.20 Per Sq yard Working Traveling Using equipment using Supplies Expected use of cost driver 24 +76 1775 + 1225 65000 + 35000 (B) (A) x (B) (A (A) x (B) Activity cost pool (A) Commercial Activity based Expected Cost driver overhead rate 24 $ 250.00 1775$ 20.00 65000 $ 1.20 Cost Assigned $ 6,000 $ 35,500 $ 78,000 $ 119,500 Traveling Using equipment using Supplies Total Cost assigned (B) Residential Activity based overhead rate 250.00 20.00 1.20 Expected Cost driver $ 76 $ 1,225 $ 35,000 $ $ $ Cost Assigned $ 19,000 $ 24,500 $ 42,000 $ 85,500 Calculations of profit using ABC Less Less Revenue Direct Labor Overhead cost Profit $ $ $ Commercial 315,000$ 175,000 $ 119,500 $ 20,500 $ Residential 780,000 325,000 85,500 369,500