Shady Lady Sells Window Coverings Shades And Blinds

Exercise 17 5shady Lady Sells Window Coverings Shades Blinds And Aw

Exercise 17-5 Shady Lady sells window coverings (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year. Commercial Residential Revenues $296,800 $484,900 Direct material costs $29,600 $49,700 Direct labor costs 102,000 Overhead costs 84,500 Operating income (loss) $80,600 ($18,600) The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers.

As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed: Activity Cost Pools Estimated Overhead Cost Drivers Scheduling and travel $105,900 Hours of travel Setup time 75,720 Number of setups Supervision 52,780 Direct labor cost Expected Use of Cost Drivers per Product Commercial Residential Scheduling and travel 1, Setup time Compute the activity-based overhead rates for each of the three cost pools.

Sample Paper For Above instruction

Introduction

The assignment involves analyzing product costing and overhead allocation for Shady Lady, a company specializing in selling window coverings to two distinct customer segments: commercial and residential. The focus is on calculating activity-based overhead rates, determining costs assigned to each product line, and assessing operating income based on refined cost models. Understanding these allocations is crucial for managerial decision-making aimed at improving profitability, especially within the residential segment which appears less profitable despite potentially lower installation complexities.

Activity-Based Overhead Rate Calculation

The first step involves computing the activity-based overhead rates for each of the three activity cost pools: scheduling and travel, setup time, and supervision. These rates are derived by dividing the estimated overhead costs of each activity by their respective cost drivers. For scheduling and travel, the estimated overhead is $105,900, with an expected driving factor of hours of travel. For setup time, the overrheads total $75,720, with the number of setups serving as the activity driver. Supervision overheads amount to $52,780, applied based on direct labor costs.

Assuming the expected use of cost drivers per product, the rates are calculated as follows:

• Scheduling and travel: $105,900 / total hours of travel (data not provided in full, but the rate should be rounded to two decimal places based on actual data)
• Setup time: $75,720 / total number of setups
• Supervision: $52,780 / total direct labor cost, which is apportioned between the two product lines based on direct labor costs.

Cost Assignment to Product Lines

Using the activity-based overhead rates, the overhead costs assigned to each product line are computed by multiplying the rates by the respective activity levels for each segment. For example, the commercial segment, with a specific number of scheduled activities, would have its overhead calculated by summing the products of activity levels and rates. The same applies to the residential segment.

The formulas entail:

• Overhead for scheduling and travel: rate × hours of travel (or number of trips)
• Overhead for setup: rate × number of setups
• Overhead for supervision: rate × direct labor cost

After calculating these, the total assigned costs for both segments will give a more accurate picture of the overhead expenses attributable to each product line.

Determining Operating Income

With costs allocated accurately, the operating income for each product line can be recalculated by subtracting the assigned overhead and direct costs from revenues. This will highlight whether the residential product line's profitability improves under activity-based costing, helping management understand the true cost structure and identify areas for efficiency improvements.

Conclusion

Accurate overhead allocation using activity-based costing provides valuable insights into the true profitability of each product segment. For Shady Lady, this refined approach allows for better strategic decisions, pricing, and cost control. Proper analysis indicates that overhead costs are not spread uniformly and that some products may be over- or under-costed under traditional methods. Recognizing these differences enables the company to enhance profitability, especially in underperforming segments like residential window coverings.

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