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 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 $14,820 17 40 Using equipment Equipment hours 40,300 3,900 2,300 Using supplies Area serviced in square yards 78,200 150,000 80,000 Total overhead $133,320 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 a. Revenue Direct Labor Overhead Profit b. Total Overhead Profit
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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
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 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 | $14,820 | 17 | 40 | |
| Using equipment | Equipment hours | 40,300 | 3,900 | 2,300 | |
| Using supplies | Area serviced in square yards | 78,200 | 150,000 | 80,000 | |
| Total overhead | $133,320 |
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 | ||
| a. | Revenue | ||
| Direct Labor | |||
| Overhead | |||
| Profit | |||
| b. | Total Overhead | ||
| Profit |
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