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 33,000 hours last year, 22,000 on residential jobs and 11,000 on commercial jobs. Wages were $16 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 $34 per hour for residential work, but only $26 per hour for commercial work.

Required:

a. If overhead for the year was $101,220, what were the profits of the residential and commercial services using labor-hours as the allocation base? (Do not round intermediate calculations. Round final answers to the nearest whole dollar.)
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	$	16,120			17			45
Using equipment	Equipment hours		34,100			3,700			1,800
Using supplies	Area serviced in square yards		51,000			120,000			50,000
Total overhead		$	101,220

Recalculate profits for commercial and residential services based on these activity bases. (Do not round intermediate calculations. Round final answers to the nearest whole dollar.)

                              Commercial                          Residential

Revenue

Direct Labor

Overhead

Profit

Total OVerhead

Profit

Answer 1

Predetermined overhead rate = Estimated overhead / Estimated direct labor hours = $101,220 / 33,000 = $3.06727 per labor hour

Computation of Profits
Particulars	Commercial	Residential
Revenue (11,000*$26) || (22,000*$34)	$286,000	$748,000
Direct labor (11,000*$16) || (22,000*$16)	$176,000	$352,000
Overhead (11,000*$3.06727) || (22,000*$3.06727)	$33,740	$67,480
Profit	$76,260	$328,520

Solution b:

Allocation of Overhead using ABC
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Commercial	Residential
Usage	Allocated Costs	Usage	Allocated Costs
Travelling	$16,120	Nos of clients served	62	$260	17	$4,420	45	$11,700
Using Equipment	$34,100	Equipment hours	5500	$6.20	3700	$22,940	1800	$11,160
Using Supplies	$51,000	Area serviced in square yards	170000	$0.30	120000	$36,000	50000	$15,000
Total	$101,220					$63,360		$37,860

Computation of Profits
Particulars	Commercial	Residential
Revenue	$286,000	$748,000
Direct labor	$176,000	$352,000
Overhead	$63,360	$37,860
Profit	$46,640	$358,140

hope you got the answer, please comment for any clarification

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