Problem 1 Aire Lock installs window coverings for both commercial and residentia

Question

Problem 1 Aire Lock installs window coverings for both commercial and residential customers. The following information relates to its budgeted operations for the current year. Revenues Commercial Residential $300,000 $480,000 Direct material costs $ 30,000 $ 70,000 Direct labor costs 100,000 300,000 Overhead costs 55,000 185,000 162,000 532,000 Operating income (loss) $115,000 ($ 52,000) The controller, Alma Ortiz, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window cov

Explanation / Answer

(a) Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line.

Scheduling and travelling       $84,000 / 1,680 = $50 per travel hour
Setup time                            $77,000 / 700    = $110 per setup
Supervision                          $56,000 / 400,000 = $0.14 per dollar value of DL cost

Overhead assigned            Commercial     Residential  
Scheduling and travelling    
1,000 x $50                         $50,000
680 x $50                                                $34,000

Setup time
450 x $110                         $49,500
250 x $110                                               $27,500

Supervision
$100,000 x $0.14              $14,000
$300,000 x $0.14                                    $42,000
                                      ____________________
Total                             $113,500        $103,500

(b) Compute the operating income for the each product line, using the activity-based overhead rates.

                                              Commercial     Residential
Revenues                                $300,000         $480,000        
Direct material costs                 $30,000         $70,000        
Direct labor costs                    $100,000         $300,000        
Overhead costs                       $113,500         $103,500         
                                              $243,500         $473,500
Operating income (loss)            $56,500           $6,500

(c) What do you believe Alma Ortiz should do?

Using activity based cost allocation shows that instead of allocating overhead costs traditionally based on DL cost depicts more accurate cost assignment to both the products on the basis of identifiable resource utilizaton. The traditional costing system assigns Commercial product line $55,000 only i.e. $217,000 / 4 whereas activity based system allocates $113,500 i.e. $58,500 more than traditional system. As a consequence Resedential product line show loss of $52,000 ($58,500 - $6,500).

Alma should use activity based cost allocation instead of using traditional costing system.


Problem 2 Hmong Instruments manufactures two products:
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