Question

Problem 7-19 Evaluating the Profitability of Services (LO2, LO3, L04) 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 Snow removal Travel to jobs Job support Other (costs of idle capacity and organization-sustaining costs) Activity Measure Square metres cleaned (ees) Kilometres driven Number of jobs Activity for the Year 40,720 hundred square metres 20,000 kilometres 250 jobs None The total cost of operating the company for the year is $450,000, which includes the following costs: Wages Supplies Snow removal equipment depreciation Vehicle expenses Office expenses President's compensation $174,000 44,000 24,000 44,000 68,000 96,000 Total cost $450,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption across Activity Cost Pools

Answer 1

Solution: 1 First stage of allocation of costs to the activity cost pools Snow Travel to Job Removal Jobs Support Other Total Wages $139,200 $17,400 $17,400 $174,000 Supplies $44,000 0 0 0 $44,000 Snow Removal equipment dept. $20,400 0 $3,600 $24,000 Vehicle expenses $28,600 0 $15,400 $44,000 Office expenses 0 $30,600 $37,400 $68,000 President's compensation $33,600 $62,400 $96,000 Total Cost $203,600 $46,000 $64,200 $136,200 $450,000 2 Computation of the activity rates for the activity cost pools. Activity Cost Pool Activity rate Snow removal ($203,600/40,720) $ 5.00 per hundred square meters Travel to jobs ($46,000/20,000) $ 2.30 per kilometer Job support ($64,200/250) $ 256.80 per job Activity Cost Pool Snow removal (4,300/100 $5) Travel to jobs (83 x $2.30) Job support (one Job cost only) ABC cost $215.00 $190.90 $256.80 $662.70 Total $496.65 Sales (given) Costs: Snow removal Travel jobs Job support $215.00 $190.90 $256.80 $662.70 $(166.05) Product margin (Loss)