Question 2:

Farm and Pet Veterinary Clinic in a small town is offering two primary services, farm animal

services and pet care services. Providing veterinary care to farm animals requires travel to the

farm (house calls), while veterinary care to pets generally requires that the pet be brought into

the clinic.

As part of an investigation to determine the contribution that each of these two typesof

services makes to overall profit, one partner argues for allocating overhead using activity-based

costing while the other partner argues for a simpler overhead cost allocation on the basis of

direct labour hours. The partners agreed to use next years budgeted data, as prepared by their

accountant, for analysis and comparison purposes. The following overhead data are collected

to develop the comparison.

Required:

(a)

Using traditional costing system, compute

the

total overhead

cost

assigned to

both

services of Farm and Pet Veterinary Clinic.

(3 marks)

(b)

Compute the total overhead cost assigned to both services under the Activity Based Costing

(ABC) method.

(11 marks)

(c)

The cost estimating of services is not required by the accounting standard. State and

explain three reasons why the partners of Farm and Pet Veterinary Clinic are still interested

to estimate the cost of their services.

(6 marks)

Budgeted cost drivers used by Activity cost pools Pets Farm animals Drug treatment Surgery Travel Consultation Cost drivers Estimated Budgeted overhead use of cost $ drivers Treatments 64,000 4,000 Operations 65,000 800 Mileage 28,000 28,000 Appointment 33,000 3,000 /Calls 1,700 200 26,000 600 2,200 600 2,000 2,400 30,000 5,000 2,000 3,000 Accounting / administration Direct labour hours Boarding and grooming 100% Pet 40,000 260,000