Using ABC in a service company Blanchette Plant Service completed a special landscaping job for Kerry Company. Blanchette uses ABC and has the following predetermined overhead allocation rates:
The Kerry job included $750 in plants; $1,300 in direct labor; one design; and 30 plants.
Requirements
What is the total cost of the Kerry job?
If Kerry paid $3,540 for the job, what is the operating income or loss?
If Blanchette desires an operating income of 30% of cost, how much should the company charge for the Kerry job?

Blanchette Plant Service

ABC Costing Technique:

1. Total cost of the Kerry job:

Plants =            $750

Direct labor =  1,300

Total cost = $2,050

2. Determination of operating income or loss (Kerry's job):

Service Revenue =   $3,540

less cost of service    2,050

Operating income = $1,490

3. With desired operating income of 30% of cost:

Operating income = $615 ($2,050 x 30%)

The company can charge the Kerry job $2,665 ($2,050 + 615) or ($2,050 x 1.3)

Explanation:

Operating income or loss is the difference between revenue and costs of providing the services or goods.  When the revenue exceeds the operating cost, the difference is an operating income.  When the revenue is exceeded by the operating cost, the difference is an operating loss.  While the former means that the organization has added value to its resources, the latter implies that the organization has lost some value to its resources, thereby reducing the equity of the owners in the business entity.

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