Shady Lady sells window coverings to both commercial and residential customers. Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line.
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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 50,000 180,000 150,000 500,000
Operating income (loss) $120,000 ($ 20,000)
The controller, Wanda Lewis, 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 to install 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 $90,000 Hours of travel
Setup time 70,000 Number of setups
Supervision 40,000 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 the each product line, using the activity-based
overhead rates.
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