Question

The Superior Gardening Service provides gardening services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system.

Activity Cost Pool   Total Cost    Total Activity

Gardening $125,425 17,300 hours

Job support 28,134 1,775 jobs

Client support 4,530 280 clients

Other     150,000 Not applicable

Total   $308,089

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

One particular client, the Gutierrez family, requested 24 jobs during the year that required a total of 175 hours of gardening. For this service, the client was charged $2,500.

Required:
a. Compute the activity rates for the activity cost pools. Round off all calculations for the nearest 2 decimals.
b. Using the activity-based costing system, compute the customer margin for the Gutierrez family. Round off all calculations to the nearest 2 decimals.
c. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of gardening hours. Compute the margin for the Gutierrez family. Round off all calculations to the nearest 2 decimals.

Answer 1

a.)	Activity Cost Pool	Total Cost $	Total Activity	Activity rate $
	Gardening	125,425	17,300 hours	7.25
	Job support	28,134	1,775 jobs	15.85
	Client support	4,530	280 clients	16.18
	Other	150,000	Not applicable
	Total	308,089
b.)		Amount in $
	Revenue from client	2,500.00
	Less: Gardening	1,268.75
	(175 x 7.25 )
	Less: Job Support	380.40
	(15.85 x 24 )
	Less: Client Support	16.18
	Less: Other	535.71	Allocated on no. of client
	( 150,000 x 1 ) / 280
	Customer margin	298.96
c.)	Allocation rate	17.81	(308,089 / 17,300 )
		Amount in $
	Revenue from client	2,500.00
	Less: Cost allocation	3,116.75
	(17.81 x 175 )
	Customer margin	-616.75