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Duckhorn Housecleaning provides housecleaning services to its clients. The company uses an activity-based costing system for...

Duckhorn Housecleaning provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system. Activity Cost Pool Total Cost Total Activity Cleaning $645,576 72,700 hours Job support $129,546 5,400 jobs Client support $ 20,900 760 clients Other $110,000 Not applicable Total $906,022 The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. One particular client, the Lumbard family, requested 31 jobs during the year that required a total of 62 hours of housecleaning. For this service, the client was charged $1,620 Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round off all calculations to the nearest whole cent.

b. Using the activity-based costing system, compute the customer margin for the Lumbard family. Round off all calculations to the nearest whole cent.

c. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Lumbard family. Round off all calculations to the nearest whole cent.

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Homework Answers

Answer #1

Answer to part A:

Calculation of the activity rates:-
Activity Name        TotalCost     Total Activity            Activity Rates
Cleaning    $645,576      72,700 hours            $8.88 per hour
Job support           $129,546        5,400 jobs              $23.99 per job
Client support        $20,900         760 clients              $27.50 per client

Answer to part B:

Calculation of customer margin for the family:-

Client charges = $1,620.00
Costs: Cleaning = $550.56
     Job support = $ 743.69
Client support = $ 27.50
Total Cost:       = $ 1,321.75
Hence Customer margin = $ 298.25

Working Note:

Calculation of costs:
Cleaning: 62 hours × $8.88 per hour = $550.56
Job support: 31 jobs × $23.99 per job = $743.69
Client support: 1 client × $27.50 per client = $27.50

Answer to part C:

Calculation of the margin if all costs are allocated on the basis of cleaning hours:

Predetermined overhead rate = $906,022 ÷ 72,700 hours = $12.46 per hour

Client charges = $1,620.00
Allocated costs= $ 772.52
Customer margin = $ 847.48

Working Note

Allocated cost = 62 hours × $12.46 per hour = $772.52

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