Question

enosha Winter Services is a small, family-owned snow-removal business. For its services, the company has always charged a flat fee per hundred square metres of snow removal. The current fee is $11.60 per hundred square metres. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on more remote properties that require considerable travel time. The owner’s daughter, home from school for the summer, has suggested investigating this question using ABC. After some discussion, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below: Activity Cost Pool Activity Measure Activity for the Year Snow removal Square metres cleaned (00s) 36,730 hundred square metres Travel to jobs Kilometres driven 16,250 kilometres Job support Number of jobs 400 jobs Other (costs of idle capacity and organization-sustaining costs) None NA The total cost of operating the company for the year is $405,000, which includes the following costs: Wages $ 156,000 Supplies 41,000 Snow removal equipment depreciation 21,000 Vehicle expenses 41,000 Office expenses 62,000 President’s compensation 84,000 Total cost $ 405,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption across Activity Cost Pools Snow Removal Travel to Jobs Job Support Other Total Wages 80 % 10 % 0 % 10 % 100 % Supplies 100 % 0 % 0 % 0 % 100 % Snow removal equipment depreciation 85 % 0 % 0 % 15 % 100 % Vehicle expenses 0 % 65 % 0 % 35 % 100 % Office expenses 0 % 0 % 45 % 55 % 100 % President’s compensation 0 % 0 % 35 % 65 % 100 % Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on. Required: 1. Prepare the first-stage allocation of costs to the activity cost pools. (Do not leave any empty spaces; input a 0 wherever it is required.) 2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.) 3. The company recently completed a 3,700-square-metre snow removal job at Hometown Hardware—a 77-kilometre round-trip journey from Kenosha’s offices. Compute the cost of this job using the ABC system. (Round your answers to 2 decimal places.) 4. The revenue from the Hometown Hardware job was $429.20 (3,700 square metres at $11.60 per hundred square metres). Prepare a report showing the margin from this job. ( Round your answers to 2 decimal places.)

Answer 1

Solution

Kenosha Winter Services

1. First stage allocation of costs to the activity cost pools:

First-stage allocation
	Snow- Removal	Travel to Jobs	Job Support	Other	Total
Wages	$124,800	$15,600	0	$15,600	$156,000
Supplies	$41,000	0	0	0	$41,000
Snow removal equipment depreciation	$17,850	0	0	$3,150	$21,000
Vehicle expenses	$0	$26,650	0	$14,350	$41,000
Office Expenses	$0	0	$27,900	$34,100	$62,000
President's Compensation	$0	0	$29,400	$54,600	$84,000
Total Cost	$183,650	$42,250	$57,300	$121,800	$405,000

Note –

The allocations are made based on the percentage of usage of cost pools.

For instance, wages –

Snow removal = 156,000 x 80% = 124,800

Travel to jobs = 156,000 x 10% = 15,600

Job support = 156,000 x 0 = 0

Other = 156,000 x 10% = 15,600

2. Computation of the activity rates for the activity cost pools –

Activity Cost Pool	Activity Rate
Snow Removal	$0.05 per sq. mt
Travel to Jobs	$2.60 per Km
Job Support	$143.25 per job

Computations –

Activity Pools	Activity Cost	Activity Usage	Activity rate = activity cost/activity usage
Snow Removal	$183,650	3,673,000 sq. mt	$0.05 per sq. mt
Travel to Jobs	$42,250	16,250 Km	$2.60 per Km
Job Support	$57,300	400 jobs	$143.25 per job

3. Computation of cost of job – 3,700 sq.mt snow removal job, 77- Km round trip

Activity Cost Pool	Activity Rate	Activty Usage	Cost Assigned
Snow Removal	$0.05 per sq. mt	3,600 sq. mt	$180
Travel to Jobs	$2.60 per Km	77 Km	$200.20
Job Support	$143.25 per job	1 job	$143.25
Total			523.45

4. Computation of margin from the job –

Sales		$429.20
Costs:
Snow removal	$180
Travel to jobs	$200.20
Job Support	$143.25
Total costs		$523.45
Margin	($94.25)