Charles has been compiling year-end financial data for the painting business where he works. The company specializes in the painting of both residential and commercial properties. Charles would like to determine what division is more profitable for the company so that they can shift costs appropriately. Charles used activity-based costing based on support costs to allocate the Manufacturing Overhead (MOH) costs. He performed calculations and allocations and determined the following division information:
Based upon the information provided by Charles, use vertical analysis to determine which division is using support costs more effectively as a percentage of sales.
A) The residential division, as it is using 0.97% less support cost than the commercial division.
B) The residential division, as it is using 0.97% more support cost than the commercial division.
C) The residential division, as it is using 2.35% less support cost than the commercial division.
D) The residential division, as it is using 2.35% more support cost than the commercial division.

Question

Charles has been compiling year-end financial data for the painting business where he works. The company specializes in the painting of both residential and commercial properties. Charles would like to determine what division is more profitable for the company so that they can shift costs appropriately. Charles used activity-based costing based on support costs to allocate the Manufacturing Overhead (MOH) costs. He performed calculations and allocations and determined the following division information:
 Based upon the information provided by Charles, use vertical analysis to determine which division is using support costs more effectively as a percentage of sales.
A) The residential division, as it is using 0.97% less support cost than the commercial division. 
B) The residential division, as it is using 0.97% more support cost than the commercial division. 
C) The residential division, as it is using 2.35% less support cost than the commercial division. 
D) The residential division, as it is using 2.35% more support cost than the commercial division.

Quizplus · Accepted Answer

Draw on analytics learned throughout the text. For each division, calculate total support costs, and divide by sales to arrive at the percentage of sales that is being used to cover those costs. Residential: ($30,000 + $22,000)/$175,000 = 0.2971 or 29.71%. Commercial: ($50,000 + $32,400)/$257,000 = 0.3206 or 32.06%. This means that the residential division is using 2.35% less of their sales to cover their support costs than the commercial division (Choice C).

Charles Has Been Compiling Year-End Financial Data for the Painting