Chapter 5, Problem 5.35P

First-stage allocation, time-driven activity-based costing, service sector. LawnCare USA provides lawn care and landscaping services to commercial clients. LawnCare USA uses activity-based costing to bid on jobs and to evaluate their profitability. LawnCare USA reports the following budgeted annual costs:

Wages and salaries	$360,000
Depreciation	72,000
Supplies	120,000
Other overhead	288,000
Total overhead costs	$840,000

John Gilroy, controller of LawnCare USA, has established four activity cost pools and the following budgeted activity for each cost pool:

Activity Cost Pool	Activity Measure	Total Activity for the Year
Estimating jobs	Number of job estimates	250 estimates
Lawn care	Number of direct labor-hours	10,000 direct labor-hours
Landscape design	Number of design hours	500 design hours
Other	Facility-sustaining costs that are not allocated to jobs	Not applicable

Gilroy estimates that LawnCare USA’s costs are distributed to the activity-cost pools as follows:

Sunset Office Park, a new development in a nearby community, has contacted LawnCare USA to provide an estimate on landscape design and annual lawn maintenance. The job is estimated to require a single landscape design requiring 40 design hours in total and 250 direct labor-hours annually. LawnCare USA has a policy of pricing estimates at 150% of cost.

1. 1. Allocate LawnCare USA’s costs to the activity-cost pools and determine the activity rate for each pool.

Required

1. 2. Estimate total cost for the Sunset Office Park job. How much would LawnCare USA bid to perform the job?
2. 3. LawnCare USA does 30 landscape designs for its customers each year. Estimate the total cost for the Sunset Office park job if LawnCare USA allocated costs of the Landscape Design activity based on the number of landscape designs rather than the number of landscape design-hours. How much would LawnCare USA bid to perform the job? Which cost driver do you prefer for the Landscape Design activity? Why?
3. 4. Sunset Office Park asks LawnCare USA to give an estimate for providing its services for a 2-year period. What are the advantages and disadvantages for LawnCare USA to provide a 2-year estimate?