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 hours. A. Traditional Costing with plant wide method: Using traditional costing the company calculated the overhead cost based on 20 000 hours of activity: Activity cost pools Receptionist Office supplies Gas Depreciation Total Estimated cost $ 25,000 $ 3,000 $ 32,500 $ 37,500 $ 98,000 Required - Part A: 1. Calculate the overhead rate using the plant wide method (one rate). 2. Calculate the overhead rate using the departmental method for residential and commercial. Allocate 13 000 hours to Commercial and 7 000 hours to Residential cleaning department. Provide your responses on the spreadsheet titled "Required 1 and 2'. B. Activity Based Costing: 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) 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 B. Activity Based Costing: 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) 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 Receptionist Office supplies Gas Depreciation Total Estimated cost Cost driver (allocation based) $ 13,000 Direct labour hour $ 1,500 Direct labour hour $ 13,000 KM $ 15,000 KM $ 42,500 Total Quantity of Unit allocation based 13,000 hour 13,000 hour 120,000 KM 120,000 KM Residential Activity cost pools Receptionist office supplies Gas Depreciation Total Estimated cost Cost driver (allocation based) $ 12,000 Direct labour hour $ 1,500 Direct labour hour $ 19,500 KM $ 22,500 KM $ 55,500 Total Quantity of Unit allocation based 7,000 hour 7,000 hour 130,000 KM 130,000 KM The direct labour is $20/hour and the cleaning supplies (direct material) cost is $6.50 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 week, SUPER CLEAN worked on two jobs. Job 1 (residential) Direct labour 130 hours Direct material 0.1 liter per direct labour hour KM 1,600 KM Job 2 (commercial) 190 hours 0.2 liter per direct labour hour 1,200 KM Required - Part B: 3. Calculate the overhead rates for each activity cost pool for commercial and residential cleanings. Provide your response on the spreadsheet titled 'Required 3' 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). Required - Part B: 3. Calculate the overhead rates for each activity cost pool for commercial and residential cleanings. Provide your response on the spreadsheet titled "Required 3'. 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. Estimate total cost for Jobs 1 and 2 using traditional costing Provide your responses on the spreadsheet titled "Required 4-5-6'. Required - Part C: 7. Write a memo to the CEO of SUPERCLEAN with your recommendation as to which of the two costing methods (Traditional or Activity Based Costing), they should adopt? Backup your recommendation by including the following discussion points: > At least two advantages of activity Based Costing > At least two disadvantages of Activity Based Costing > At least two challenges that can arise in implementing Activity Based Costing The memo should be no more than 250 words, 1.5 line spacing, Arial font and MS Word format
