Shady Lady sells window coverings to both commercial and residential customers. The following information relates to its budgeted operations for the current year.
|
| Commercial |
| Residential | |
| Revenues |
| $300,000 |
| $480,000 |
| Direct material costs | $30,000 |
| $50,000 | |
| Direct labor costs | 100,000 |
| 300,000 | |
| Overhead costs | 85,000 | 215,000 | 150,000 | 500,000 |
| Operating income (loss) |
| $85,000 |
| ($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:
| Activity Cost Pools | Estimated Overhead | Cost Drivers | ||
| Scheduling and travel | $105,000 | Hours of travel | ||
| Setup time | 70,000 | Number of setups | ||
| Supervision | 60,000 | Direct labor cost | ||
| Expected Use of Cost Drivers per Product | ||||
| Commercial | Residential | |||
| Scheduling and travel | 1,000 | 500 | ||
| Setup time | 450 | 250 | ||
Instructions
(a) Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line.
(b) Compute the operating income for each product line, using the activity-based overhead rates.
(c) What do you believe Peggy Kingman should do?
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