Finance and Accounting
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 Estimated cost Receptionist $ 25,000 Office supplies $ 3,000 Gas $ 32,500 Depreciation $ 37,500 Total $ 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'.Commercial Activity cost pools Estimated cost Allocation base Receptionist Office supplies Gas Depreciation Total hrs Commercial overhead rate Required 2SUPER CLEAN Costs For base year Activity cost pools Estimated cost Allocation base Receptionist Office supplies Gas Depreciation Total hrs Plant-wide overhead allocation > > Required 1Residential Activity cost pools Estimated cost Allocation base Receptionist Office supplies Gas Depreciation Total hrs Required 2 Residential overhead rateRequired - 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'.Job 1 (residential) Job 2 (commercial) Labour rate $20.00 Direct labour hour 130 190 Cleaning supplies $6.50 Direct material liter per DLH 0.10 0.20 KM 1,600 1,200 Activity Based Costing Job 1 (residential) Job 2 (commercial) Fixed costs (overhead) Receptionist Office supplies Gas Depreciation Total Overhead cost per unit > > > Required 4Variable costs Job 1 (residential) Job 2 (commercial) Direct labour (Ctrl) - Direct material + Total Total costs > > Required 5 Total costs per unit5 Traditional costing 6 Job 1 (residential) Job 2 (commercial) 8 Direct labour 9 Direct material 0 Direct Overhead Total Cost per unit > > > > Required 6Required - 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. IB. 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 Estimated cost Cost driver (allocation Total Quantity of Unit pools based) allocation based Receptionist $ 13,000 Direct labour hour 13,000 hour Office supplies $ 1,500 Direct labour hour 13,000 hour Gas $ 13,000 KM 120,000 KM Depreciation $ 15,000 KM 120,000 KM Total $ 42,500Residential Activity cost Estimated cost Cost driver (allocation Total Quantity of Unit pools based) allocation based Receptionist $ 12,000 Direct labour hour 7,000 hour Office supplies $ 1,500 Direct labour hour 7,000 hour Gas $ 19,500 KM 130,000 KM Depreciation $ 22,500 KM 130,000 KM Total $ 55,500 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) Job 2 (commercial) Direct labour 130 hours 190 hours Direct material 0.1 liter per direct labour hour 0.2 liter per direct labour hour KM 1,600 KM 1,200 KMA B D E F G H Commercial Activity cost pools Estimated cost Cost driver (allocation based) Total Quantity of allocation based Unit Rates Receptionist Direct labour hour hour Office supplies per direct labour hour Direct labour hour hour per direct labour hour Gas KM KM per KM Depreciation KM KM per KM Total Residential Activity cost pools Estimated cost Cost driver (allocation based) Total Quantity of allocation based Unit Rates Receptionist Direct labour hour hour per direct labour hour Office supplies Direct labour hour hour per direct labour hour Gas KM KM per KM Depreciation KM KM per KM Total
