$9-43.$ Activity$-$Based Costing in a Service Environment

$($LO $9-3,4,5)$

Heidt Cleaning Services $($HCS$)$ is a local custodial service company serving both the residential and commercial markets. The owner is considering dropping the commercial clients because that business seems only marginally profitable.

Twenty$-$five employees worked a total of $37,500$ hours last year, $25,000$ on commercial jobs and $12,500$ on residential jobs. Wages were $$20$ per hour for all work done. Any materials used are included in overhead as supplies. All overhead is allocated on the basis of labor$-$hours worked, which is also the basis for customer charges. Given current economic conditions and competition, HCS bills residential clients $$40$ per hour and commercial clients $$30$ per hour.

Required

a$.$ If overhead for the year was $$337,500,$ what were the profits of the residential and commercial services using labor$-$hours as the allocation base?

b$.$ Overhead consists of costs of supervision, equipment used $($including vehicle rental$),$ and supplies used, which can be traced as follows:

$\backslash$table$[[$Activity$,$Cost Driver,Cost,Cost Driver Volume$],[$ommercial$,$Residential$],[\backslash$table$[[$Supervision $.............],[$Equinment depreciation$]],$Number of clients served,$$42,000,20,64],[\backslash$table$[[$Equipment depreciation$],[$and lease$]],$Equipment hours,$155,500,3,000,2,000],[$Miscellaneous supplies.,Area serviced in square yards,$140,000,76,000,36,000],[$Total overhead.,,$$337,500,,]]$

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

c$.$ What recommendations do you have for management regarding dropping the commercial clients?