Activity-Based Costing in a Nonmanufacturing Environment

question 17

Essay

Activity-based costing in a nonmanufacturing environment.Crystal Clear,Inc. ,is a pool service.The company originally specialized in serving residential clients but has recently started contracting for work with larger commercial clients,like hotels.Dudley Waters,the owner,is considering reducing residential services and increasing commercial pool service.Five field employees worked a total of 15,000 hours last year-10,000 on residential jobs and 5,000 on commercial jobs.Wages were $8 per hour for all work done.Direct materials used were minimal and are included in overhead.All overhead is allocated on the basis of labor hours worked,which is also the basis for customer charges.Because of greater competition for commercial accounts,Mr.Waters can charge $20 per hour for residential work,but only $17 per hour for commercial work.
Required:
a.If overhead for the year was $75,000,what were the profits of commercial and residential service using labor hours as the allocation base?
b.Overhead consists of office supplies,garden supplies,and depreciation and maintenance on equipment.These costs can be traced to the following activities:

Recalculate profits for commercial and residential services based on these activity bases.
c.What recommendations do you have for management?

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Definitions:

Social Cohesion

The bonds or "glue" that bring people together in society, fostering a sense of belonging and mutual support.

Presumed Competence

The assumption that an individual is capable and knowledgeable in a certain area without needing explicit evidence.

Primary Group

A group with strong emotional ties and bonds that endure over time. This type of group tends to be more informal and intimate than other groups that individuals belong to. See also Secondary group.

Secondary Group

A group that is formal and impersonal, often organized around instrumental goals. See also Primary group.