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. Commercial Residential Revenues $302,500 $451,000 Direct materials costs $40,000 $50,000 Direct labor costs 110,000 290,000 Overhead costs 67,500 217,500 136,000 476,000 Operating income (loss) $85,000 $(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 yctivity cost pools and related information she developed Estimated Activity Cost Pools Overhead Cost Drivers Scheduling and travel $67,500 Hours of travel Setup time 96,000 Number of setups Supervision 40,000 Direct labor cost Estimated Use of Cost Drivers per Product Commercial Residential Scheduling and travel 750 600 Setup time 350 250

Answer 1

1.

	Overhead rates
Scheduling and travel	50	per hour	[67500/(750+600)]
Set up time	160	per set up	[96000/(350+250)]
Supervision	0.10	per dollar	[40000/(110000+290000)]

2.

	Commercial	Residential
Scheduling and travel	37500 [750*50]	30000 [600*50]
Setup time	56000 [350*160]	40000 [250*160]
Supervision	11000 [ 110,000*0.1]	29000 [ 290000*0.1]
Total cost assigned	104500	99000

3.

	Commercial	residential
Revenues	302500	451000
Direct material costs	40000	50000
Direct Labor costs	110000	290000
Overhead costs	104500	99000
Operating income (loss)	48000	12000