Question

Elite Lawn & Plowing (EL&P) is a lawn and snow plowing service with both residential and commercial clients. The owner believes that the commercial sector has more growth opportunities and is considering dropping the residential service.

Twenty employees worked a total of 41,000 hours last year, 28,000 on residential jobs and 13,000 on commercial jobs. Wages were $14 per hour for all work done. Any materials used are included in overhead as supplies. All overhead is allocated on the basis of labor-hours worked, which is also the basis for customer charges. Because of increased competition for commercial accounts, EL&P can charge $36 per hour for residential work, but only $26 per hour for commercial work.

Required:

a. If overhead for the year was $120,860, what were the profits of the residential and the commercial services using labor-hours as the allocation base? (Do not round intermediate calculations.)

b. Overhead consists of costs of traveling to the site, using equipment (including vehicle rental), and using supplies, which can be traced as follows:

					Cost Driver Volume
Activity	Cost Driver	Cost			Commercial			Residential
Traveling	Number of clients served	$	15,960			17			40
Using equipment	Equipment hours		38,400			3,900			2,100
Using supplies	Area serviced in square yards		66,500			110,000			80,000
Total overhead		$	120,860

Recalculate profits for commercial and residential services based on these activity bases. (Do not round intermediate calculations.)

Answer 1

Overhead allocation based on ABC
Activity	Cost driver	Cost	Cost allocation
			Residential		Commercial
Traveling	Number of client served	15960	11200	15960*(40/57)	4760	15960*(17/57)
Using equipment	Equipment hour	38400	13440	38400*(2100/6000)	24960	38400*(3900/6000)
Using supplies	Area serviced in square yards	66500	28000	66500*(80000/190000)	38500	66500*(110000/190000)
			52640		68220

	Residential		Commercial
Revenue	28000 hour*36	1008000	13000 hour*26	338000
Less: variable cost
Direct labor	28000hour*14	392000		182000
Overhead		52640		68220
Profit		563360		87780