Concept explainers
Venus Creations sells window treatments (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year.
The controller, Peggy Kingman, 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 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
Activity Cost Pools | Estimated Overhead | Cost Drivers | |||
Scheduling and travel | $85,000 | Hours of travel | |||
Setup time | 90,000 | Number of setups | |||
Supervision | 60,000 | Direct labor cost | |||
Expected Use of Cost Drivers per Product | |||||
Commercial | Residential | ||||
Scheduling and travel | 750 | 500 | |||
Setup time | 350 | 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 each product line, using the activity-based overhead rates.
(c) What do you believe Peggy Kingman should do?
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Managerial Accounting: Tools for Business Decision Making
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