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 38,000 hours last year, 22,000 on residential jobs and 16,000 on commercial jobs. Wages were $13 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 $32 per hour for residential work, but only $26 per hour for commercial work. Required: a. If overhead for the year was $132,350, what were the profits of the residential and commercial services using labor-hours as the allocation base? (Do not round intermediate calculations. Round final answers to the nearest whole dollar.) b. Overhead consists of costs of traveling to the site, using equipment (including vehicle rental), and using supplies, which can be traced as follows. Activity Traveling Using equipment Using supplies Total overhead Cost Driver Number of clients served Equipment hours Area serviced in square yards Cost $ 15,390 37, 760 79,200 $132,350 Cost Driver Volume Commercial Residential 17 40 3,600 2,300 140,000 80,000 Recalculate profits for commercial and residential services based on these activity bases. (Do not round intermediate calculations. Round final answers to the nearest whole dollar.)

Answer 1

Solution a:

Predetermined overhead rate = Estimated overhead / Estimated direct labor hours = $132,350 / 38000 = $3.48289 per labor hour

Computation of Profits
Particulars	Commercial	Residential
Revenue	$416,000.00	$704,000.00
Direct labor	$208,000.00	$286,000.00
Overhead	$55,726.00	$76,624.00
Profit	$152,274.00	$341,376.00

Solution b:

Allocation of Overhead using ABC
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Commercial		Residential
					Usage	Allocated Costs	Usage	Allocated Costs
Travelling	$15,390.00	Nos of clients served	57	$270.00	17	$4,590.00	40	$10,800
Using Equipment	$37,760.00	Equipment hours	5900	$6.40	3600	$23,040.00	2300	$14,720
Using Supplies	$79,200.00	Area serviced in square yards	220000	$0.36	140000	$50,400.00	80000	$28,800
Total	$132,350.00					$78,030		$54,320

Computation of Profits
Particulars	Commercial	Residential
Revenue	$416,000.00	$704,000.00
Direct labor	$208,000.00	$286,000.00
Overhead	$78,030.00	$54,320.00
Profit	$129,970.00	$363,680.00