Financial Management MGMT8500

Financial Management MGMT8500
Activity-based costing assignment
 
Weight: 20% of your final grade
A service company, SUPER CLEAN, provides commercial and residential cleaning services. The company is currently using a job costing system. Overhead are allocated based on the direct labour hour. The company uses the number of labour hour to calculate the overhead rate as follow:

Activity cost pools Estimated cost
Receptionist  $  25,000
Office supplies  $    3,000
Gas  $  32,500
Depreciation  $  37,500
Total  $ 98,000

 
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 100,000 KM
Depreciation  $  15,000 KM 100,000 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 150,000 KM
Depreciation  $  22,500 KM 150,000 KM
Total  $  55,500

 
The direct labour is $20/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:

  1. Calculate the overhead rate using the plant wide method (one rate)
  2. Calculate the overhead rate using the departmental method (two rates)
  3. Calculate the overhead rates for each activity cost pool for commercial and residential cleanings.
  4. Estimate the total overhead costs and overhead cost per unit hour for each job.
  5. Estimate the total costs (including direct labour and material) and total cost per unit for job 1 (residential) and job 2 (commercial).
  6. List and explain three benefits and two disadvantages of ABC systems.

Rubric

Topic Marks
Overhead rate plant wide method 2
Overhead rate departmental method 4
ABC Rates 16
Total overhead costs and overhead cost per unit for each job 8
Total costs and total cost per unit for each job 8
List and explain three benefits and two disadvantages of ABC systems. 10
Professionalism and appearance 2
Total 50