Question

3 Problem 7-19 Evaluating the Profitability of Services (LO2, LO3, LO4) 25 points 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: eBook References Activity Cost Pool Snow removal Travel to jobs Job support Other (costs of idle capacity and organization-sustaining costs) Activity Measure Square metres cleaned (005) Kilometres driven Number of jobs Activity for the Year 40, 720 hundred square metres 20,000 kilometres 250 jobs None NA 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

Answer 1

1.

Prepare the first-stage allocation of costs to the activity cost pools as follows:

	Snow Removal	Travel to Jobs	Job Support	Other	Total
Wages	$139,200	$17,400	$0	$17,400	$174,000
Supplies	$44,000	$0	$0	$0	$44,000
Snow removal equipment depr.	$20,400	$0	$0	$3,600	$24,000
Vehicle expenses	$0	$28,600	$0	$15,400	$44,000
Office expenses	$0	$0	$30,600	$37,400	$68,000
President's compensation	$0	$0	$33,600	$62,400	$96,000
Total cost	$203,600	$46,000	$64,200	$136,200	$450,000

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2.

Compute the activity rates for the activity cost pools as follows:

		Activity rates
Snow removal	$203600 ÷ 40,720	$5 per hundred square meters
Travel to jobs	$46,000 ÷ 20,000	$2.3 per kilometer
Job support	$64,200 ÷ 250	$256.80 per job

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3.

Compute the cost of this job using the ABC system as follows:

Activity cost pool	ABC Cost
Snow removal (4,300 sq mtr × $5)	$21,500
Travel to jobs (83 kilometre × $2.30)	$190.90
Job support	$256.80
Total	$21,948

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4.

Prepare a report showing the margin from this job as follows:

Sales (4300 Square metres × $11.55)		$49,665
Costs:
Snow removal	$21,500
Travel to jobs	$190.90
Job support	$256.80	$21,948
Product margin		$27,717