Question

Desert Garden Inc. is a lawn and garden care service. It originally specialized in serving small residential clients, but recently started contracting for work on office building grounds. Gwen Greenthumb (owner) has heard about ABC and has engaged you to develop a profitability analysis of her two lines of business using ABC.

Five field employees worked a total of 20,000 hours last year; 13,000 on residential jobs and 7,000 on commercial jobs. Wages amounted to $10.00 per hour for all work done. Materials are included in overhead.

All overhead is currently allocated using the traditional method of allocation on the basis of labor-hours worked, which also is the basis for customer charges. Gwen can charge $22 per hour for residential work, but only $18 per hour for commercial work.

REQUIRED:

If overhead for the year was $65,000 what were the profits of commercial and residential service using labor-hours as the allocation base?

Overhead consists of transportation, equipment use, and supplies, which can be traced to the following activities:

						Activity Level
Activity		Cost Driver		Cost		Commercial		Residential
Transportation		Number of clients		$   11,000		15		25
Equipment use		Equipment hours		18,000		3,750		2,250
Supplies		Area serviced in square yards		36,000		170,000		30,000
TOTAL OVERHEAD:				$   65,000

Recalculate profits for the commercial and residential services, based on these activity bases. (i.e., using ABC.)

Answer 1

Overhead rate = $65000/20000 hours = $3.25 per labor hour

	Residential	Commercial
Revenue	286000	126000
	(13000 x $22)	(7000 x $18)
Wages cost	130000	70000
	(13000 x $10)	(7000 x $10)
Overhead cost	42250	22750
	(13000 x $3.25)	(7000 x $3.25)
Profit $	113750	33250

Activity	Cost $	Total Activity Level	Activity Rate $	Residential		Commercial
				Activity Level	Cost $	Activity Level	Cost $
Transportation	11000	40	275	25	6875	15	4125
Equipment use	18000	6000	3	2250	6750	3750	11250
Supplies	36000	200000	0.18	30000	5400	170000	30600
Total	65000				19025		45975

	Residential	Commercial
Revenue	286000	126000
	(13000 x $22)	(7000 x $18)
Wages cost	130000	70000
	(13000 x $10)	(7000 x $10)
Overhead cost	19025	45975
Profit $	136975	10025