Question

In: Accounting

SUPER CLEAN realises that the traditional method of allocating overhead is not accurate because the gas...

SUPER CLEAN realises that the traditional method of allocating overhead is not accurate because the gas and depreciation do not vary with direct labour. The company wants to use the activity-based-costing system to allocate the costs of the receptionist, office supplies, gas and car usage (depreciation) in order to get more accurate cost estimates. This information will help management to give more accurate quotes and improve the company’s profitability.

Break-down of costs between commercial and residential cleanings.

Commercial

Activity cost pools	Estimated cost	Cost driver (allocation based)	Total Quantity of allocation based	Unit
Receptionist	$ 13,000	Direct labour hour	10,000	hour
Office supplies	$ 1,500	Direct labour hour	10,000	hour
Gas	$ 13,000	KM	110,000	KM
Depreciation	$ 15,000	KM	110,000	KM
Total	$ 42,500

Residential

Activity cost pools	Estimated cost	Cost driver (allocation based)	Total Quantity of allocation based	Unit
Receptionist	$ 12,000	Direct labour hour	6,000	hour
Office supplies	$ 1,500	Direct labour hour	6,000	hour
Gas	$ 19,500	KM	140,000	KM
Depreciation	$ 22,500	KM	140,000	KM
Total	$ 55,500

The direct labour is $21/hour and the cleaning supplies (direct material) cost is $5.50 per liter. The cleaning supplies are 0.2 liter per labour hour for commercial cleaning and 0.1 liter per labour hour for residential cleaning.

During the course of the week, SUPER CLEAN worked on two jobs.

	Job 1 (residential)	Job 2 (commercial)
Direct labour	100 hours	180 hours
Direct material	0.1 liter per direct labour hour	0.2 liter per direct labour hour
KM	1,600 KM	1,000 KM

Required – Part B:

Estimate the total overhead costs and overhead cost per unit hour for each job.
Estimate the total costs (including direct labour and material) and total cost per unit for job 1 (residential) and job 2 (commercial).
Estimate total cost for Jobs 1 and 2 using traditional costing

Expert Solution

In the books of SUPER CLEAN

1. Statement showing overhead cost per unit hour for each job

	JOB 1 (Residential)	JOB 2 (Commercial)
Particulars (Activity)	Overhead cost per activity (A) (WN-1)	Cost driver (B)	Overhead Cost($)	Overhead cost per activity (A) (WN-1)	Cost driver (B)	Overhead Cost($)
Receptionist	2 per labour hr	100 hours	200	1.3 per labour hr	180 hours	234
Office Supplies	0.25 per labour hr	100 hours	25	0.15 per labour hr	180 hours	27
Gas	0.139 per KM	1600 KM	222.4	0.118 per KM	1000 KM	118
Depreciation	0.160 per KM	1600 KM	256	0.136 per KM	1000 KM	136
Total Overhead cost for the job (A)			703.4			515
Direct Labour Hours (B)			100			180
Overhead cost per unit hour (A)/(B)			7.034			2.861

2. Statement showing Total cost per unit for each job

Particulars	JOB 1 ($)	JOB 2 ($)
Direct material	55 (100(5.500.1))	198 (180(5.500.2))
Direct Labour	2100 (100*21)	3780 (180*21)
Overheads	703.4	515
Total Cost (A)	2858.4	4493
Direct labour hours (B)	100	180
Total cost per unit hour (A)/(B)	28.58	24.96

(c) Statement showing estimated total cost for each under traditional costing

Particulars	JOB 1 ($)	JOB 2 ($)
Direct material	55 (100(5.500.1))	198 (180(5.500.2))
Direct Labour	2100 (100*21)	3780 (180*21)
Overheads (WN-2)	925 (100*9.25)	765 (180*4.25)
Total Cost (A)	3080	4743
Direct labour hours (B)	100	180
Total cost per unit hour (A)/(B)	30.80	26.35

WN-1: Calculation of Budgeted Overhead cost per activity

(a) Commercial Cleaning

Activity cost pools	Estimated cost ($)	Cost Driver (Allocation based)	Total quantity of allocation based	Overhead cost per activity
Receptionist	13000	Direct Labour hour	10000	1.3 per labour hr
Office Supplies	1500	Direct Labour hour	10000	0.15 per labour hr
Gas	13000	KM	110000	0.118 per KM
Depreciation	15000	KM	110000	0.136 per KM
Total	42500

(b) Residential Cleaning

Activity cost pools	Estimated cost ($)	Cost Driver (Allocation based)	Total quantity of allocation based	Overhead cost per activity
Receptionist	12000	Direct Labour hour	6000	2 per labour hr
Office Supplies	1500	Direct Labour hour	6000	0.25 per labour hr
Gas	19500	KM	140000	0.139 per KM
Depreciation	22500	KM	140000	0.160 per KM
Total	55500

WN-2: Calculation of pre determined overhead rate per labour hour under traditional costing system

Particulars	Residential	Commercial
Total Overhead cost	55500	42500
Direct labour hours	6000	10000
Overhead recovery rate per DLH	9.25	4.25

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