Question

Exercise 17-14 Venus Creations seil window treatments (shades, blinds, and wings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year. Commercial Residential Revenues $299,700 $185,000 Direct materials costs $30,700 $50,500 Direct labor costs 107,000 293,500 Overhead costs 84,500 222,200 150.000 494,000 Operating income (oss) 1727500 60 The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more proftable 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 ona per dient visk for residental 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 Cout Pool Cour Divers Scheduling and travel Setup time Supervision Estimated Overhead 390 500 87,000 57,000 Hours of travel Number of setups Direct labor cost Expected Use of Cost Drivers per Product Commercial Residential Scheduling and travel Setup time 350 280

Answer 1

1. Activity based overhead rates:

	Overhead Rates
Scheduling and travel	$63.29
Setup time	$138.10
Supervision	14.23%

Calculations:

	Commercial	Residential	Total Base
Hours of travel	840	590	1430
Setup time	350	280	630
Direct labor costs	$107,000	$293,500	$400,500

	Estimated overhead		Base		Overhead Rate
Scheduling and travel	$90,500	÷	1430	=	$63.29
Setup time	$87,000	÷	630	=	$138.10
Supervision	$57,000	÷	$400,500	=	14.23%

2. Overhead cost assigned:

	Commercial	Residential
Scheduling and travel	$53,161	$37,339
Setup time	$48,333	$38,667
Supervision	$15,226	$41,765
Total cost assigned	$116,720	$117,771

Calculations:

Commercial
	Base		Overhead Rate		Total Cost assigned
Scheduling and travel	840	x	$63.29	=	$53,161
Setup time	350	x	$138.10	=	$48,333
Supervision	$107,000	x	14.23%	=	$15,226

Residential
	Base		Overhead Rate		Total Cost assigned
Scheduling and travel	590	x	$63.29	=	$37,339
Setup time	280	x	$138.10	=	$38,667
Supervision	$293,500	x	14.23%	=	$41,765

3. Operating income (loss):

	Operating income (loss)
Commercial	$45,280
Residential	$23,229

Calculations:

	Commercial	Residential
Revenues	$299,700	$485,000
Direct materials costs	($30,700)	($50,500)
Direct labor costs	($107,000)	($293,500)
Overhead costs	($116,720)	($117,771)
Operating income (loss)	$45,280	$23,229