Kathy Edwards Owns a Landscape Maintenance Service That Has Two

question 51

Essay

Kathy Edwards owns a landscape maintenance service that has two major segments,residential and commercial.Kathy is trying to decide whether she should use traditional costing or activity-based costing,so she develops the following estimates for her analysis and asks you to help.
$\begin{array}{lrrr}&\text { Residential}&\text { Commercial }&\text { Totals }\\ \text { Annual revenues } & \$ 200,000 & \$ 600,000 & \$ 800,000 \\\text { Annual labor costs } & 120,000 & 180,000 & 300,000 \\\text { Hours of operation } & 10,000 & 40,000 & 50,000 \\\text { Travel time in hours } & 2,000 & 8,000 & 10,000\end{array}$
The business also has overhead costs for equipment maintenance,transportation,and general activities of $360,000.
$\begin{array}{lcc} \text { Cost Pool}& \text { Cost Pool Amount}& \text { Cost Driver}\\\hline \text { Equipment Maintenance } & \$ 150,000 & \text { Hours of equipment operation } \\\text { Transportation } & 120,000 & \text { Travel time } \\\text { General activities } & 90,000 & \text { Labor cost }\end{array}$

(1) Using the traditional allocation method, calculate the predetermined overhead rate and allocate the overhead costs to the segments based on labor cost.

(2) What is the income for each segment assuming the company uses traditional costing?

(3) Using activity-based costing, determine the overhead rates for each activity and allocate the overhead costs to each segment.

(4) What is the income for each segment assuming the company uses traditional costing?

(5) What are your recommendations to Kathy?

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Definitions:

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