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    Reducing residential services & increasing commercial lawn care

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    company considering changing mix to increase commercial and lessen residential
    5 employees worked total 10,000 hours last year. 6,400 on residential and 3,600 commercial
    wages were $9 per work for all.
    -direct materials were minimal and included in overhead. all overhead is allocated on basis of labor hours worked.
    -charges $23 per hour for residential and $18 per commercial
    1)if overhead was $62,000 prepare an income statement to calculate profits of both services using labor hours as allocation base for overhead. Income statement should have 3 columns residential, commercial total.
    2)A more detailed analysis of overhead revealed that it consists of three components: office supplies, garden supplies, and depreciation and maintenance of equipment. These costs can be traced to the following activities:
    Activity Level
    Activity Cost Driver Cost Commercial Residential
    Office Supplies Number of clients served $8,000 15 45
    Equipment Deprec.
    and maintenance Equipment Hours 18,000 3,500 2,500
    Garden Supplies Area Covered
    (square yards) 36,000 65,000 35,000
    Total Overhead $62,000

    Prepare an income statement to recalculate the profits of each of the two services, commercial and residential, using Activity Based Costing to allocate overhead costs. The income statement should have three columns, one for commercial services, one for residential services, and one for the totals. Please show all calculations.

    (C) As noted above, the owner is considering a strategy of reducing residential services and increasing commercial lawn care. Based on your ABC analysis in part (b), what recommendations do you as to this strategy?

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    Solution Preview

    The response addresses the query posted in 452 words with APA references

    //In the following paragraphs, a company is considering changing its mix to increase the commercial and reduce the residential with the evaluation of activity-based costing method against the existing absorption costing method for indirect costs. There will also be an evaluation of the results of both the costing methods for making a rational decision. //

    The company needs to calculate its indirect costs and direct costs for both, commercial and ...

    Solution Summary

    The expert examines the strategies for reducing residential services and increasing commercial lawn care. The response addresses the query posted in 452 words with APA references.