Assignment
Retired Professor Housecleaning
Retired Professor Housecleaning provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system.
|
Activity Cost Pool
|
Total Cost
|
Total Activity
|
|
Cleaning
|
$645,576
|
72,700 hours
|
|
Job support
|
$129,546
|
5,400 jobs
|
|
Client support
|
$ 20,900
|
760 clients
|
|
Other
|
$110,000
|
|
|
Total
|
$906,022
|
|
The "Other" activity cost pool consists of the cost of idle capacity based on a normal capacity measure.
One particular client, the Anderson family, requested 31 jobs during the year that required a total of 62 hours of housecleaning. For this service, the client was charged $1,620
Required:
1) Compute the activity rates (i.e., cost per unit of activity) for all the activity cost pools.
2) Using the activity-based costing system, compute the customer margin for the Anderson family.
3) Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Anderson family.
4) The president of Retired Professor Housecleaning asks you to explain your decision about how you handled the cost of idle capacity in your calculations above. Explain your reasoning to the president.
5) The president also asks you about possible cost savings that could be realized by reducing the total number of jobs by 50. Since the activity level for jobs will decrease, the president says that the savings must be calculated by multiplying the decline in jobs times the activity rate for job support. What is your response to the president?