Problem:
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?