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Thread: Accounting - Activity Based Costing

  1. #1
    Junior Member
    Jan 2008

    Accounting - Activity Based Costing

    Shady Lady sells window coverings to both commerical and residential customers. She is concerned about the residential line and why it is not as profitable as the commerical line. She is looking for a more accurate product costing model to develop. Budgeted operations for the year are:
    Revenue = $300,000
    Direct Material Costs = 30,000
    Direct Labour Costs = 100,000
    Overhead costs = 50,000
    Income = 120, 000
    Revenue = $480,000
    DM Costs = 50,000
    DL costs = 300,000
    Overhead costs = 150,000
    Income (loss) = (20,000)

    She develops 3 activity cost pools with the related information:
    Cost Pools are:
    Scheduling and Travel (hours of travel): Estimated Overhead = 90,000
    Set-up time (# of setups): Est. OH = 70,000
    Supervision (Direct labour cost): Est. OH = 40,000
    (cost drivers in brackets)

    Expected use of cost drivers:
    Scheduling and travel: commercial = 1000, residential = 500
    set-ep time: commercial = 450, residential = 250

    A) Compute the activity based OH rates for each cost pool and determine the OH cost assigned to each product line.
    B) Compute the operating income for each product line using the ABC OH rates
    C) What should she do?

    For A), my OH rates for each cost pool are $60 (sched. and travel) and $100 (set-up time). OH costs assigned to each line are $105,000 for commercial and $55,000 for residential.

    Im looking for some verification on answers that I have, mainly for question B). My income for commercial is $125,000 and for residential is $335,000. I was wondering if anyone could verify if thats right, and if not explain to me how to get it. Thanks.
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  2. #2
    Dec 2007
    Ottawa, Canada
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