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Problem 2 (LO3, LO4) Product and Customer Profitability Analysis PWC Systems, Inc., makes jet skis and...
Problem 2 (LO3, LO4)
Product and Customer Profitability Analysis
PWC Systems, Inc., makes jet skis and other personal watercraft for sale through specialty sporting goods stores. The company has a standard jet ski model, but also makes custom-designed models. Management has designed an activity-based costing system with the following activity cost pools activity rates:
Activity Cost Pool Activity Rates
Supporting manufacturing $22 per direct labour-hour
Order processing $212 per order
Custom design processing $243 per custom design
Customer service $307 per customer
Management would like an analysis of the profitability of a particular customer, Wave Rider, which has ordered the following products over the last 12 months:
Standard Customer
Model Design
Number of jet skis 16 3
Number of orders 2 3
Number of custom designs 0 3
Direct labour-hours per jet ski 24.5 28.0
Selling price per jet ski $10,600 $13,200
Direct materials cost per jet ski $7,950 $9,240
The company's direct labour rate is $24 per hour.
Required:
Using the company's activity-based costing system, compute the customer margin of Wave Rider.
Problem 3 (LO2, LO3)
Activity-Based Costing and Bidding on Jobs
Vance Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company's estimator has been involved in a long-simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between routine work such as removal of asbestos insulation around heating pipes in older homes and non-routine work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that non-routine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: "My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square metres by $4,000 per thousand square metres to determine the bid price. Since our average cost is only $3,000 per thousand square metres, that leaves enough cushion to take care of the additional costs of non-routine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tearing things apart."
To shed light on this controversy, the company initiated an activity-based costing study of all of its costs. Data from the activity-based costing system follow:
Activity Cost Pool Activity Measure Total Activity
Removing asbestos Thousands of square metres 500,000 m2
Estimating and job setup Number of jobs 200 jobs*
Working on non-routine jobs Number of non-routine jobs 25 non-routine jobs
Other (costs of idle capacity and
organization-sustaining costs) Not applicable; these costs are
not allocated to jobs
*The total number of jobs includes non-routine jobs as well as routine jobs. Non-routine jobs as well as routine jobs require estimating and setup work.
Wages and salaries $200,000
Disposal fees 600,000
Equipment depreciation 80,000
On-site supplies 60,000
Office expenses 190,000
Licensing and insurance 370,000
Total cost $1,500,000
Distribution of Resource Consumption
across Activity Cost Pools
Estimating Working on
Removing and Job Non-routine
Asbestos Setup Jobs OtherTotal
Wages and salaries 40% 10% 35% 15% 100%
Disposal fees 70% 0% 30% 0% 100%
Equipment depreciation 50% 0% 40% 10% 100%
On-site supplies 55% 15% 20% 10% 100%
Office expenses 10% 40% 30% 20% 100%
Licensing and insurance 50% 0% 40% 10% 100%
Required:
- Perform the first-stage allocation of costs to the activity cost pools.
- Compute the activity rates for the activity cost pools.
- Using the activity rates you have computed, determine the total
cost and the average cost per thousand square metres of each of the
following jobs according to the activity-based costing system.
- A routine 2,000-square-metre asbestos removal job.
- A routine 4,000-square-metre asbestos removal job.
- A non-routine 2,000-square-metre asbestos removal job.
- Given the results you obtained in (3) above, do you agree with the estimator that the company's present policy for bidding on jobs is adequate?
Solutions
Expert Solution
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| PWC Systems, Inc., | |||
| Workings | Standard Model | Customer Design | Note |
| Number of jet skis | 16.00 | 3.00 | A |
| Direct labor-hours per jet ski | 24.50 | 28.00 | B |
| Total Direct labor-hours | 392.00 | 84.00 | C=A*B |
| Direct labor rate | 24.00 | 24.00 | D |
| Direct labor cost per unit | 588.00 | 672.00 | E=B*D |
| F | G | H=F*G |
|
J=F*I |
|
||||||
| Standard Model | Customer Design | ||||||||||
| Activity cost pool | Activity Measure | ABC Rates | Activity used | Cost assigned | Activity used | Cost assigned | |||||
| Supporting manufacturing | Direct Labor Hour | 22.00 | 392.00 | 8,624.00 | 84.00 | 1,848.00 | |||||
| Order processing | Number of orders | 212.00 | 2.00 | 424.00 | 3.00 | 636.00 | |||||
| Custom design processing | Number of custom design | 243.00 | - | - | 3.00 | 729.00 | |||||
| Customer service | Number of customer | 307.00 | 1.00 | 307.00 | 1.00 | 307.00 | |||||
| Total Cost assigned | 9,355.00 | 3,520.00 | K | ||||||||
| Units produced | 16.00 | 3.00 | L | ||||||||
| Costs per unit | 584.69 | 1,173.33 | M=K/L | ||||||||
| Direct materials cost | 7,950.00 | 9,240.00 | |||||||||
| Direct labor cost | 588.00 |
|
672.00 | See E | |||||||
| Total Costs per unit | 9,122.69 | 11,085.33 | N | ||||||||
| Selling price per jet ski | 10,600.00 | 13,200.00 | O | ||||||||
| Customer margin | 1,477.31 | 2,114.67 | P=O-N |
| Vance Asbestos | |||||||||||
| Costs | Amount | Removing | Job Setup | Non Routine | Other | Total | Removing | Job Setup | Non Routine | Other | Total |
| Wages & Salaries | 200,000.00 | 40% | 10% | 35% | 15% | 100% | 80,000.00 | 20,000.00 | 70,000.00 | 30,000.00 | 200,000.00 |
| Disposal fees | 600,000.00 | 70% | 0% | 30% | 0% | 100% | 420,000.00 | - | 180,000.00 | - | 600,000.00 |
| Equipment Depreciation | 80,000.00 | 50% | 0% | 40% | 10% | 100% | 40,000.00 | - | 32,000.00 | 8,000.00 | 80,000.00 |
| On-site supplies | 60,000.00 | 55% | 15% | 20% | 10% | 100% | 33,000.00 | 9,000.00 | 12,000.00 | 6,000.00 | 60,000.00 |
| Office Expenses | 190,000.00 | 10% | 40% | 30% | 20% | 100% | 19,000.00 | 76,000.00 | 57,000.00 | 38,000.00 | 190,000.00 |
| Licensing and Insurance | 370,000.00 | 50% | 0% | 40% | 10% | 100% | 185,000.00 | - | 148,000.00 | 37,000.00 | 370,000.00 |
| Total | 1,500,000.00 |
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