Green Thumb, Inc., is a lawn care service. The company originally specialized in serving residential clients but has recently started contracting for work with larger commercial clients. Mr. Green, the owner, is considering reducing residential services and increasing commercial lawn care. Five field employees worked a total of 11,000 hours last year7,500 on residential jobs and 3,500 on commercial jobs. Wages were $10.00 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. Green can charge $17.50 per hour for residential work, but only $15.50 per hour for commercial work.

Required:

a. If overhead for the year was $72,000, 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.(Show your work-Round to the nearest dollar)

Activity Level

Activity

Cost Driver

Cost

Commercial

Residential

Office Supplies

Number of Clients Served

$14,000

16

44

Equipment Depreciation & Maintenance

Equipment Hours

25,000

3,500

6,500

Garden Supplies

Area Covered (sq. yds)

33,000

65,000

35,000

Total Overhead

$72,000

c.What are the major differences between the costing methods?

d. Explain why using drivers might help management make better decisions in pricing jobs?

e. Should management use all three drivers, if not provide an explanation as to why they should or should not for each costs.