Spirits were high at the monthly meeting of the top management of Waterways. Installation was proceeding nicely on the 10 jobs for the city, and the company had just received confirmation that the local school board had accepted its bid to install irrigation systems in 25 school playgrounds. Unfortunately, not everyone was celebrating. Lee Williams, the vice-president of the installation and training division, was troubled. He has been supervising the city jobs and he believes the current system of assigning overhead costs to the jobs does not accurately reflect the actual cost of overhead. "Several major things have changed since we set our overhead rate at 120% of direct labour cost," Lee explained. I've noticed that the new systems are requiring a lot of the more expensive glue and they were designed to accommodate only titanium fasteners. We are using special packaging to transport the systems to the sites, not to mention the new heavy equipment we had to purchase to prepare the ground for the install." Madison Tremblay, vice-president of sales and marketing, was quick to respond. "I can't believe that you're suggesting there's something wrong with our bids," he retorted. He was visibly annoyed. "This is the first time in several years that our sales group has been successful in increasing our market share," he continued, "and now you want to mess with the pricing! I want you to explain that to the salespeople who have just received their first bonus commission cheques in a very long time." Ben Clark, who designed the new system, agreed with Madison, suggesting that maybe the problem was not with the cost, but was more likely cost control. Their accountant, Jordan Leigh, did not like conflict. "I have an idea." he said. "We have been investigating using a new costing system in our manufacturing plant called activity-based costing, or ABC. ABC is supposed to lead to more accurate overhead costing and it provides a better way to control overhead costs. With a little work, I think we could adapt it to our installation services." When he off ered to do an analysis and bring his recommendations back to the next management meeting, the rest of the group agreed to wait for the results before making any changes. Jordan's first action was to identify and classify all the activities that consume resources during this specific type of installation into a number of cost pools, and then determine the overhead costs that should be assigned to each cost pool. At the same time, he determined a cost driver for each pool. The following table shows these cost pools along with the estimated overhead allocation to each one. Estimated Overhead $400,400 Activity Cost Pools Supervision, security, maintenance Liability insurance Equipment costs Indirect supplies and delivery Employee benefits Cost Drivers Number of workdays Number of employees Hours of operation Length in metres Direct labour cost 108.000 88,200 226,000 141,500 $964,100 Estimated Use per Activity 1,300 800 12,600 226,000 $566,000 Then, based on the information used to prepare the bids, Jordan determined that each of the 25 projects for the school board would require the following overhead activities. Estimated Use per Job 32 4 Activity Cost Pools Supervision, security, maintenance Liability insurance Equipment costs Indirect supplies and delivery Employee benefits Cost Drivers Number of workdays Number of employees Hours of operation Length in metres Direct labour cost 250 2.900 $12.400 The material costs for each project were expected to be $12,700. (a) Calculate the estimated cost of this type of installation using both the traditional method and activity-based costing. (Round overhead rate per hour to 2 decimal places, e.g. 52.75. Round overhead rate for employee benefits to O decimal places, e.g. 15%. Round final answers to decimal places, e.g. 52.) Traditional Method $ Activity-based Costing $
