Activity-Based Costing in a Service Environment
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 20,000 hours last year, 13,000 on residential jobs and 7,000 on commercial jobs. Wages were $25 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 $60 per hour for residential work, but only $45 per hour for commercial work.
Required
- a. If overhead for the year was $205,000, what were the profits of the residential and commercial services using labor-hours as the allocation base?
- b. Overhead consists of costs of traveling to the site, using equipment (including vehicle rental), and using supplies, which can be traced as follows:
Recalculate profits for commercial and residential services based on these activity bases.
- c. What recommendations do you have for management regarding the profitability of these two types of services?
Want to see the full answer?
Check out a sample textbook solutionChapter 9 Solutions
Fundamentals Of Cost Accounting (6th Edition)
- Target service costs, value engineering, activity-based costing. Lagoon is an amusement park that offers family-friendly entertainment and attractions. The park boasts more than 25 acres of fun. The admission price to enter the park, which includes access to all attractions, is $35. To earn the required rate of return on investment, Lagoon’s target operating income is 35% of total revenues. Lagoon’s managers have identied the major activities that drive the cost of operating the park. The activity cost pools, the cost driver for each activity, and the cost per unit of the cost driver for each pool are:arrow_forwardQ.LawnCare USA does 30 landscape designs for its customers each year. Estimate the total cost for the Sunset Office park job if LawnCare USA allocated costs of the Landscape Design activity based on the number of landscape designs rather than the number of landscape design-hours. How much would LawnCare USA bid to perform the job? Which cost driver do you prefer for the Landscape Design activity? Why?arrow_forwardFountain Water Products (FWP) manufacturers water bottles. They have historically used a traditional system that allocated the manufacturing overhead costs based on machine hours. FWP is looking at switching to an ABC system in order to ensure more accurate product costing. They first want to compare the traditional and ABC costing systems to determine if it is worth the effort and costs to implement and maintain. They estimate a total overhead cost of $459,000. Under the traditional system they identified machine hours as the cost driver, and estimated a total of 51,000 machine hours. They actually incurred 48,700 machine hours in production. The total applied MOH calculated under the more precise ABC system was $320,000. The ABC costing system will cost $50,000 to implement. FWP has determined that a benefit of more accurate costing by $80,000 is worth the $50,000 implementation cost. What is the difference between the ABC costing and traditional system? Enter your number as a…arrow_forward
- 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 39,000 hours last year, 24,000 on residential jobs and 15,000 on commercial jobs. Wages were $15 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 $33 per hour for residential work, but only $26 per hour for commercial work. Required: a. If overhead for the year was $118,550, 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…arrow_forwardTasty Treats is a snow cone stand near the local park. To plan for the future, it wants to determine its cost behavior patterns. It has the following information available about its operating costs and the number of snow cones served Month January February March. April May June Number of snow cones 6,400 7,000 6,200 6,900 7,600 7,250 Total operating costs $5,830 $6,400 $5,840 $6,330 $6,820 $6,575 Using the high-low method, the monthly operating costs, if Tasty Treats sells 8,000 snow cones in a month, are:arrow_forwardElite 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 37,000 hours last year, 24,000 on residential jobs and 13,000 on commercial jobs. Wages were $15 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 $37 per hour for residential work, but only $27 per hour for commercial work. Required: a. If overhead for the year was $123,640, 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…arrow_forward
- 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 39,000 hours last year, 25,000 on residential jobs and 14,000 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 $25 per hour for commercial work. Required: a. If overhead for the year was $115,980, 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…arrow_forwardElite 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 36,000 hours last year, 24,000 on residential jobs and 12,000 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 $37 per hour for residential work, but only $29 per hour for commercial work. Required: If overhead for the year was $132,620, 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.) Overhead consists of…arrow_forwardIdentifying variable, fixed, and mixed costs Philadelphia Acoustics builds innovative speakers for music and home theater systems. Identify each cost as a variable (V), fixed (T), or mixed (M), relative to the number of speakers produced and sold. Units of production depreciation on routers used to cut wood enclosures. Wood for speaker enclosure-5. Patents on crossover relays. Total compensation to the salesperson who receives a salary plus a commission based on meeting sales goals. Crossover relays. Straight-line depreciation or manufacturing plant. Grill cloth. Insurance on the corporate office. Glue. Quality inspector’s salary.arrow_forward
- 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 36,000 hours last year, 26,000 on residential jobs and 10,000 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 $34 per hour for residential work, but only $27 per hour for commercial work. Required: a. If overhead for the year was $133,320, 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…arrow_forward4. Hicks Contracting collects and analyzes cost data in order to track the cost of installing decks on new home construction jobs. The following are some of the costs that they incur. Classify these costs as fixed or variable costs and as product or period costs. Costs Variable / Fixed Product / Period Lumber used to construct decks ($12.00 per square foot) Carpenter labor used to construct decks ($10 per hour) Construction supervisor salary ($45,000 per year) Depreciation on tools and equipment ($6,000 per year) Selling and administrative expenses ($35,000 per year) Rent on corporate office space ($34,000 per year) Nails, glue, and other materials required to construct deck (varies per job)arrow_forwardM & J Mechanical sells and services plumbing, heating, and air conditioning systems. M & J's cost accounting system tracks two cost categories: direct labor and direct materials. M & J uses a time-and-materials pricing system, with direct labor marked up 100% and direct materials marked up 40% to recover indirect costs of support staff, support materials, and shared equipment and tools and to earn a profit. Data table During a hot summer day, the central air conditioning in Susan Lee's home stops working. M & J technician Sam Austen arrives at Lee's home and inspects the air conditioner. He considers two options: replace the compressor or repair it. The cost information available to Austen follows: Repair option Replace option Labor rate Labor 7 hrs. 1 hrs. $40 per hour Materials $160 $280 Xarrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College