QUESTION
Hillview Garden Care 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 large apartment and office building grounds. Since Phyllis Flower (owner) believes that commercial lawn care is more profitable she is considering dropping residential services altogether.
.
Five field employees worked a total of 25,000 hours last year, 16,250 on residential jobs and 8,750 on commercial jobs. Wages amounted to $10 per hour for all work done. Direct materials used are included in overhead as supplies. All overhead is allocated on the basis of labour-hours worked, which is also the basis for customer charges. Because of the increased competition for commercial accounts, Phyllis can charge $25 per hour for residential work but only $21 per hour for commercial work.
Recently, Phyllis attended an accounting workshop on overhead-costing and activity analysis. She applied what she had learnt on the company. Further analysis revealed that the overheads consist consist of activities relating to transportation, equipment use and supplies.· These costs are attributed to the following cost drivers as shown below:
Activity Cost Driver Cost Commercial Residential?
Transportation Number of clients $10,000 20 50
serviced
Equipment Use Equipment hours $20,000 5.500 2,600
Supplies Area serviced in $40,000 165,000 90,000
square yards _________
Total Overhead $70,000
Required:
Show workings where necessary:
a) If overhead for the year was $70,000, calculate the profits of commercial and residential service using labour hours as the allocation base. (7 marks)
b) Re-calculate the profits for commercial and residential services based on the activity cost drivers for overheads. (l0 marks)
c) Based on you results on both (a) and (b), make your recommendations to management on what action to take regarding these two types of services and explain your reasons.