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Practice Problem-1

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Lam Tien Tran
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BUSI 294

Inclass Practice Problem – Module 3 – Activity Based Costing


Question 1
Kenosha Winter Services is a small family-owned snow-removal business. For its services, the
company has always charged a flat fee per hundred square metres of snow removal. The
current fee is $11.55 per hundred square metres. However, there is some question about
whether the company is actually making any money on jobs for some customers—particularly
those located on more remote properties that require considerable travel time. The owner’s
daughter, home from school for the summer, has suggested investigating this question using
ABC. After some discussion, a simple system consisting of four activity cost pools seemed to be
adequate.

The activity cost pools and their activity measures appear below:

Activity Cost Pool Activity Measure Activity for the Year


Snow removal Square metres cleared (00s) 40,055 hundred square metres
Travel to jobs Kilometres driven 20,625 kilometres
Job support Number of jobs 250 jobs
Other (costs of idle capacity and None N/A
organization-sustaining costs)

The total cost of operating the company for the year is $442,500, which includes the following
costs:

Wages $171,000
Supplies 43,500
Snow removal equipment
23,500
depreciation
Vehicle expenses 43,500
Office expenses 67,000
President’s compensation 94,000
Total Cost $442,500
Resource consumption is distributed across the activities as follows:

Distribution of Resource Consumption across Activity Cost


Pools
Travel to Job Othe
Snow Removal Jobs Support r Total
100
Wages 80% 10% 0% 10% %
100
Supplies 100% 0% 0% 0% %
Snow removal equipment 100
depreciation 85% 0% 0% 15% %
100
Vehicle expenses 0% 65% 0% 35% %
100
Office expenses 0% 0% 45% 55% %
100
President's compensation 0% 0% 35% 65% %

Jobs support consists of receiving calls from potential customers at the home office, scheduling
jobs, billing, resolving issues, and so on.
Required:
1. Prepare the first-stage allocation of costs to the activity cost pools.
2. Compute the activity rates for the activity cost pools (round your answers to 2 decimal
places).
3. The company recently completed a 4,200-square-metre snow removal job at Hometown
Hardware – a 82-kilometre round-trip journey from Kenosha’s offices. Compute the cost of
this job using the ABC system. (Round your answers to 2 decimal places.
4. The revenue from the Hometown Hardware job was $485.10 (4,200 square metres at $11.55
per hundred square metres). Prepare a report showing the margin from this job. (Round
your answer to 2 decimal places).

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