28.    Activity-based costing in a nonmanufacturing environment. Plantcare, Inc., is a garden care service. The company originally specialized in serving residential clients but has recently started contracting for work with larger commercial clients. Ms. Plantcare, the owner, is considering reducing residential services and increasing commercial lawn care.

Five field employees worked a total of 10,000 hours last year—6,500 on residential jobs and 3,500 on commercial jobs. Wages were $9 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, Ms. Plantcare can charge $22 per hour for residential work, but only $19 per hour for commercial   work.

a.    If overhead for the year was $62,000, 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:

 

Activity Level

Activity                             Cost Driver                                                Cost       Commercial Residential

 

Office Supplies	Number of Clients Served	$ 8,000	15	45	Â
Equipment Depreciation and Maintenance	Equipment Hours	18,000	3,500	2,500	Â
Garden Supplies	Area Covered (computed as number of square yards of garden times number of times garden is serviced per year)	  36,000	65,000	35,000	Â

Total Overhead ............................................................................................    $62,000

 

Recalculate profits for commercial and residential services based on these activity bases.

c.    What recommendations do you have for management?