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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
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. 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 Estimated Overhead $457,500 86,100 89,910 248,000 138,920 $1,020,430 Estimated Use per Activity 1,500 700 11,100 248,000 $604,000 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 2,800 $12,800 The material costs for each project were expected to be $14,100. (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 0 decimal places, e.g. 15%. Round final answers to O decimal places, e.g. 52.) Traditional Method $ Activity-based Costing $
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