Question

Ari has a cab business. He recently expanded his business by including the provision of limousines in NSW. Ari’s management accountant has provided the following information on monthly revenues and costs in NSW. The Cab division has monthly revenues of $3,475,000, while the Limousine division generates revenues of $375,000. Expenses of $2,656,750 were allocated to divisions based on the number of kilometers traveled. Ari has heard about Activity Based Costing and wants to know what benefits it could provide so he has obtained the following monthly information on expenses for NSW:

	Cab	Limousine
No. of bookings	44,000	1,500
No. of km	1,200,000	150,000
No. of driver hours	67,500	10,000

Ari has identified that the main activity cost areas include salaries, vehicle costs, and booking fees.

Salaries	$1,360,000
Booking fees	$22,750
Fuel	$1,193,000
Booking call center fees	$45,500
Vehicle maintenance	$35,500

a)Identify the appropriate cost pools and calculate the appropriate driver rates for the activities listed above.

b)Using ABC costing, prepare a product line profitability report. Show all workings in your answer and ensure you have reconciled data to ensure the accuracy of calculations.

c)Discuss two (2) key observations identified from your calculations?

Answer 1

• All working forms part of the answer
• Working:

Traditional Method allocation of overhead expenses:

A	Overheads	$                     26,56,750.00
B	Total no. of Kms	1350000
C=A/B	Overhead per Kms	$                                     1.97
D	Cab: No. of kms	1200000
E=C x D	Overhead allocated to cab	$                     23,61,555.56
F	Limousine: No. of kms	150000
G=C x F	Overhead allocated to limousine	$                       2,95,194.44

Profitability as per Traditional Method

		Cab	Limousine
A	Revenues	$                     34,75,000.00	$                    3,75,000.00
B	Overhead/Expenses	$                     23,61,555.56	$                    2,95,194.44
C=A-B	Profitability if traditional method is used	$                     11,13,444.44	$                        79,805.56

• Activity Based Costing- Answer (a)

Overhead cost pool	Amount	Respective cost driver	Cab	Limousine	Total cost drivers	Activity rates
	[A]		[B]	[C]	[D=B+C]	[A/D]
Salaries	$                               13,60,000.00	No. of driver hours	67500	10000	77500	$                                  17.55	Per driver hour
Vehicle Cost	$                               12,28,500.00	No. of Kms	1200000	150000	1350000	$                                    0.91	Per kms
Booking Fees	$                                    68,250.00	No. of bookings	44000	1500	45500	$                                    1.50	Per booking
Total	$                               26,56,750.00

• Allocation of Overhead expenses as per ABC method activity rates

		Cab		Limousine
Overhead cost pool	Activity rates	No. of cost drivers	Overhead allocated	No. of cost drivers	Overhead allocated
Salaries	$                                             17.55 Per driver hour	67500 driver hours	$                  11,84,516.13	10000 driver hours	$                        1,75,483.87
Vehicle Cost	$                                                0.91 Per kms	1200000 kms	$                  10,92,000.00	150000 kms	$                        1,36,500.00
Booking Fees	$                                                1.50 Per booking	44000 booking	$                        66,000.00	1500 bookings	$                              2,250.00
Total			$                  23,42,516.13		$                        3,14,233.87

• Answer (b) : Profitability as per ABC method

		Cab	Limousine
A	Revenues	$                     34,75,000.00	$                    3,75,000.00
B	Overhead/Expenses	$                     23,42,516.13	$                    3,14,233.87
C=A-B	Profitability if ABC is used	$                     11,32,483.87	$                        60,766.13

• Answer (c)

		Cab	Limousine
A	Profitability as per ABC	$                     11,32,483.87	$                        60,766.13
B	Profitability as per traditional Method	$                     11,13,444.44	$                        79,805.56
C=A-B	Difference	$                           19,039.43	$                      (19,039.43)

Two Observations can be:

--Different activities are consumed by each of them in difference ratio, hence, using traditional method to allocate overheads on the basis of Kilometer run should not be adopted.

--Under ABC method, the Profits for Cabs are $ 19,039 lower than what they were when Traditional Costinng was being used.