Kenosha Winter Services is a small, family-owned snow-removal business. For its services, the com- pany has always charged a flat fee per hundred square metres of snow removal. The current fee is $12.75 per hundred square metres. However, there is some question about whether the company is actually mak- ing 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-Based Costing: A Tool to Aid Decision Making PROBLEMS PROBLEM 7-19 Evaluating the Profitability of Services [LO2, LO3, LO4] excel Kenosha Winter Services is a small, family-owned snow-removal business. For its services, the com- pany has always charged a flat fee per hundred square metres of snow removal. The current fee is $12.75 per hundred square metres. However, there is some question about whether the company is actually mak- ing 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 cleaned (00s) 32,000 hundred square metres Travel to jobs. . . . . Kilometres driven 15,000 kilometres Job support . . . . . .. . . . . . Number of jobs 400 jobs Other (costs of idle capacity and organization-sustaining costs). . . None NA The total cost of operating the company for the year is $390,000, which includes the following costs: Wages .... . .. . . ..... ... ... .. ...... $150,000 Supplies. . ..... . ... 40,000 Snow removal equipment depreciation. . . .. .. 20,000 Vehicle expenses . .. .... 40,000 Office expenses.. 60,000 President's compensation . . . 80,000 Total cost. .... $390,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption across Activity Cost Pools Snow Travel .Job Removal to Jobs Support Other Total Wages .... .... 80% 10% 0% 10% 100% Supplies. . .. ... .. 100% 0% 0% 0% 100% Snow removal equipment depreciation. . . . . . . . . . . . . . . . . . . 80% 0% 0% 20% 100% Vehicle expenses..... . . . . . .. . .... 0% 60% 0% 40% 100% Office expenses. . ... . . . . . . . . . .. . . 0% 0% 45% 55% 100% President's compensation . .. . . . ... . 0% 0% 40% 60% 100% Job support consists of receiving calls from potential customers at the home office, scheduling jobs, bill- ing, resolving issues, and so on. Required: 1. Using Exhibit 7-7 as a guide, prepare the first-stage allocation of costs to the activity cost pools. 2. Using Exhibit 7-8 as a guide, compute the activity rates for the activity cost pools. 3. The company recently completed a 3,500-square-metre snow removal job at Hometown Hardware-a 75-kilometre round-trip journey from Kenosha's offices. Compute the cost of this job using the ABC system. The revenue from the Hometown Hardware job was $446.25 (3,500 square metres at $12.75 per hundred square metres). Using Exhibit 7-13 as a guide, prepare a report showing the margin from this job. 5. What do you conclude concerning the profitability of the Hometown Hardware job? Explain. 6. What advice would you give the president concerning pricing jobs in the future
