Question

Marigold 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. Commercial Residential Revenues $356,500 $536,000 Direct materials costs $35,000 $50,000 Direct labor costs 140,000 260,000 Overhead costs 91,500 266,500 251,000 561,000 Operating income (loss) $90,000 $(25,000) 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 Estimated Overhead Cost Drivers Scheduling and travel $91,500 Hours of travel Setup time 91,000 Number of setups Supervision 160,000 Direct labor cost Estimated Use of Cost Drivers per Product Commercial Residential Scheduling and travel 800 700 Setup time 450 250

Compute the activity-based overhead rates for each of the three cost pools. (Round overhead rate for supervision to 2 decimal places, e.g. 0.38.) Overhead Rates Scheduling and travel $    per hour Setup time $ per setup Supervision $ per dollar

Determine the overhead cost assigned to each product line. Commercial Residential Scheduling and travel $ $ Setup time $ $ Supervision $ $ Total cost assigned $ $

Compute the operating income for each product line, using the activity-based overhead rates. Operating income (loss) Commercial $ Residential $

Answer 1

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Marigold Creations	Answer a
Calculation of ABC rates for overhead		A	B	C	D=B+C	E=D/A
Activity cost pool	Cost Driver	Cost	Commercial	Residential	Total Cost Driver Units	ABC rates
Scheduling and travel	Hours of travel	91,500.00	800.00	700.00	1,500.00	61.00
Setup time	Number of setups	91,000.00	450.00	250.00	700.00	130.00
Supervision	Direct labor cost	160,000.00	140,000.00	260,000.00	400,000.00	0.40
Total Cost assigned		342,500.00
		See E	See B	F=B*E	See C	G=C*E
Allocation table			Commercial		Residential
Activity cost pool	Cost Driver	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Scheduling and travel	Hours of travel	61.00	800.00	48,800.00	700.00	42,700.00
Setup time	Number of setups	130.00	450.00	58,500.00	250.00	32,500.00
Supervision	Direct labor cost	0.40	140,000.00	56,000.00	260,000.00	104,000.00
Total Cost assigned				163,300.00		179,200.00
Operating income Statement	Commercial	Residential
Revenues	356,500.00	536,000.00
Less:
Direct Materials	35,000.00	50,000.00
Direct Labor	140,000.00	260,000.00
Overhead Costs	163,300.00	179,200.00	See H
Operating income	18,200.00	46,800.00