Problem:
Cozy Cleaners has five employees and a president, Marty Stuart. Stuart and one of the five employees manage all the marketing and administrative duties. The remaining four employees work directly on operations. Cozy Cleaners has four service departments: dry cleaning, coin washing and drying, special cleaning, and repairs. A time report is marked, and records are kept to monitor the time each employee spends working in each department. When business is slow, there is idle time, which is marked on the time record. (Some idle time is necessary because Cozy Cleaners promises 60-minute service, and it must have reserve labor available to accommodate fluctuating peak demand periods throughout the day and the week.)
Some of the November operating data are as follows:
Coin
Dry Washing Special
Idle Time Cleaning and Drying Cleaning Repairs
Sales revenue ........................................... $4,625 $5,250 $2,000 $625
Direct labor (in hours) .......... 25 320 80 125 90
Overhead traceable to departments:
Cleaning compounds ............................ 500 250 400 0
Supplies ................................................ 125 200 175 140
Electric usage........................................ 250 625 100 25
Rent ...................................................... 200 500 90 10
Additional Information
• Each of the four employees working in the operating departments makes $8 per hour.
• The fifth employee, who helps manage marketing and administrative duties, earns $1,500 per month, and Stuart earns $2,000 per month.
• Indirect overhead (i.e., overhead that is not traceable to departments) amounted to $512 and is assigned to departments based on direct-labor hours used. Because of the idle hours, some overhead will not be assigned to a department.
• In addition to salaries paid, marketing costs for such items as advertising and special promotions totaled $400.
• In addition to salaries, other administrative costs were $150.
• All sales transactions are in cash; all other transactions are on account.
Required:
Management wants to know whether each department is contributing to the company’s profit. Prepare an income statement for November that shows the revenue and cost of services for each department. Write a short report to management about departmental profitability. No inventories were kept.