WCP$\mathrm{.}5$ 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 installation.$$

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 factory 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 offered 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.

Instructions:

a$.$ Calculate the estimated cost of this type of installation using both the traditional

method and activity$-$based costing.

b$.$ Given the information calculated in part $($a$),$ make a recommendation to the

management of Waterways as to what action they should take.

c$.$ Explain why you think Waterways$$ current bidding process would lead to increased market share