Question

Question 3 Concord 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 $311,400 $460,000 Direct materials costs $30,000 $50,000 Direct labor costs 130,000 270,000 Overhead costs 86,400 246,400 160,000 480,000 Operating income (loss) $ 65,000 $(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: Estimated Overhead Activity Cost Pools Scheduling and travel Setup time Supervision $86,400 120,000 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 750 600 Setup time 550 250 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

Answer 1

Schedule Showing computation of activity based overhead rates (per cost driver). Activity based overhead rate = Estimated Overhead / Expected use of cost driver Activity cost pool Expected use of cost driver Activity based overhead rate Estimated Overhead Scheduling & travel Setup time Supervision 86,400 120,000 40,000 246,400 1350 Hrs of Travel 800 No of setup 400000 DL Cost $ 64.00 Per hour 150.00 Per setup 0.10 Per dollar Working: Scheduling & travel Setup time Supervision Travel hour no of setup Direct labor cost Add cost drivers 750+600 550+250 130000+270000 Schedule showing assigning of each product based on the use of cost driver Cost Assigned = Expected Cost driver * Activity based overhead rate Activity cost pool Commercial Activity based Expected Cost driver overhead rate Cost Assigned 750 $ 64.00 $ 48,000 550 $ 150.00 $ 82,500 130000 $ 0.10 $ 13,000 $ 143,500 Scheduling & travel Setup time Supervision Total Cost Assigned Residential Activity based overhead rate 64.00 150.00 0.10 Expected Cost driver 600 $ 250 $ 270000 $ Cost Assigned $ 38,400 $ 37,500 $ 27,000 $ 102,900 Residential 311,400 460,000 Revenues Direct Material Direct Labor Overhead Cost Operating income (loss) Commercial $ 30,000 130,000 143,500 $ $ $ $ $ 50,000 270,000 102,900 $ 303,500 7,900 422,900 37,100