Question

Ms. Greenthumb, Inc. is a lawn and garden care service. The company originally specialized in serving small residential clients, but has recently started contracting for work on larger apartment and office building grounds. Since, Ms. Greenthumb believes that commercial lawn care is more profitable, she is considering dropping residential service altogether. Five field employees worked a total of 10,000 hours last year, 6,500 on residential jobs and 3,500 on commercial jobs. Wages amounted to $9.00 per hour for all work done. Direct 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 greater competition for commercial accounts, Ms. Greenthumb can charge $22 per hour for residential work but only $19 per hour for commercial work. An activity analysis reveals that overhead consists of transportation, equipment use costs and supplies. These costs can be traced to the following activities. Activity Level Activity Cost Driver Cost Commercial Residential Transportation $8,000 15 45 #of clients serviced Equipment use Equipment hours 18,000 3,500 2,100 Supplies 36,000 130,000 70,000 Area serviced in square yards Calculate profits for commercial and residential services based on these activity bases.

Solution:

Above is the solution to this question, but can someone explain to mean where the $133.333, $3.214, and $0.18 came from please? I don't understand that part of the solution.

thank you in Advance!

Answer 1

Computation of Activity Rates : Activity Transportation Equipment Use Supplies Overhead Cost (A) Total Cost Driver (B) Activity Rate (A/B) 8,000 60 Clients Served $133.33 Per Client Hour $ 18,000 5600 Equipment Hours $ 3.214 Per Eq Hour $ 36,000 200000 Area Serviced in Sq yard $ 0.18 Per Area Serviced in Sq Yard Note : Activity Transportation Equipment Use Supplies Total Cost Driver (B) 15+45 Clients Served 3500+2100 Equipment Hours 130000+70000 Area Serviced in Sq yard Note : Please comment down for any further clarifications