Question

Exercise 17-14 al-a2, b 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 Residential $355,050 $425,000 $30,000 $50,000 150,000 250,000 85,050 265,050 145,000 445,000 $90,000 $(20,000) 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 $85,050 105,000 40,000 Cost Drivers Hours of travel Number of setups Direct labor cost Estimated Use of Cost Drivers per Product Commercial Residential Scheduling and travel 800 550 Setup time 500 250

Answer 1

1) Overhead rate

	Overhead rate
Scheduling and travel	85050/1350 = 63 per hour
Setup time	105000/750 = 140 per setup
Supervision	40000/400000 = 0.10 per dollar

2) Overhead assigned

	Commercial	Residential
Scheduling and travel	50400	34650
Setup time	70000	35000
Supervision	15000	25000
Total	135400	94650

3) Operating profit

	Commercial	Residential
Sales revenue	355050	425000
Direct material	30000	50000
Direct labor	150000	250000
Overhead	135400	94650
Operating income (loss)	39650	30350