ACC 2233 Quiz 4

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Algonquin College *

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2233

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Accounting

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May 19, 2024

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ACC 2233 Quiz 4 Quiz 4 Activity – Based Costing and Management (10%) This assignment relates to the following Course Learning Requirements: CLR 1: Explain the role of managerial accounting in the business environment. CLR 2: Classify the various kinds of costs and calculate product costs. CLR 4: Identify and apply practices that contribute to the local and global communities through Social Responsibility. Objective of this Assignment: Exhibit your understanding of the chapter material, and the ability to calculate all required elements of the assignment. Pre-Assignment Instructions: To prepare you for this assignment, read the modules 10,11, 12 and 13 content and follow the embedded learning activities. Read Chapters 7 and 8 of the Textbook. Complete Modules 10,11, 12 and 13 Learning Activities Assignment Tasks: 1. Perform the first-stage allocation of costs to the activity cost pools. 2. Compute the activity rates for the activity cost pools. 3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square metres of each of the following jobs according to the activity-based costing system. A routine 2,000-square-metre asbestos removal job. A routine 4,000-square-metre asbestos removal job.

A non-routine 2,000-square-metre asbestos removal job. 4. Given the results you obtained in (3) above, do you agree with the estimator that the company's present policy for bidding on jobs is adequate? 5. A contribution format income statement for each year, using variable costing. Be sure to reconcile the variable costing and absorption costing operation income figures for each year. 6. A brief discussion of the advantages and disadvantages of variable over absorption costing for internal reporting purposes. 7. A discussion of the ramifications of returning to the “normal” level of production in the coming year. 8. A recommendation: Should the company continue to “overproduce” in coming years to boost operating income? Question 1 Activity-Based Costing and Bidding on Jobs Vance Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company's estimator has been involved in a long-simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between routine work such as removal of asbestos insulation around heating pipes in older homes and non-routine work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that non-routine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: "My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square metres by $4,000 per thousand square metres to determine the bid price. Since our average cost is only $3,000 per thousand square metres, that leaves enough cushion to take care of the additional costs of non-routine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tearing things apart." To shed light on this controversy, the company initiated an activity-based costing study of all of its costs. Data from the activity-based costing system follow: Activity Cost Pool Activity Measure Total Activity Removing asbestos Thousands of square metres 500,000 m2 Estimating and job setup Number of jobs 200 jobs* Working on non-routine jobs Number of non-routine jobs 25 non-routine jobs

Other (costs of idle capacity and organization-sustaining costs) Not applicable; these costs are not allocated to jobs *The total number of jobs includes non-routine jobs as well as routine jobs. Non-routine jobs as well as routine jobs require estimating and setup work. Wages and salaries $200,000 Disposal fees 600,000 Equipment depreciation 80,000 On-site supplies 60,000 Office expenses 190,000 Licensing and insurance 370,000 Total cost $1,500,000 Distribution of Resource Consumption across Activity Cost Pools Estimating Working on Removing and Job Non-routine Asbestos Setup Jobs Other Total Wages and salaries 40% 10% 35% 15% 100% Disposal fees 70% 0% 30% 0% 100% Equipment depreciation 50% 0% 40% 10% 100% On-site supplies 55% 15% 20% 10% 100% Office expenses 10% 40% 30% 20% 100% Licensing and insurance 50% 0% 40% 10% 100%

Required: 1. Perform the first-stage allocation of costs to the activity cost pools. 10 Marks 2. Compute the activity rates for the activity cost pools. 10 Marks 3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square metres of each of the following jobs according to the activity-based costing system. a. A routine 2,000-square-metre asbestos removal job. b. A routine 4,000-square-metre asbestos removal job. c. A non-routine 2,000-square-metre asbestos removal job. 10 Marks 4. Given the results you obtained in (3) above, do you agree with the estimator that the company's present policy for bidding on jobs is adequate? 5 Marks Question 2 Absorption Costing and Ethics “There must be something wrong with these statements!” exclaimed Hugh Richards, president of Ajax Inc. “They just don’t make sense. We sold the same number of units this year as we did last year, yet our profit have tripled! Who messed up the calculations?” Ajax Inc. Is a medium size supplier of plastic components to the automobile industry and has been in business for 25 years. Sales forecasting has been relatively easy to do in the past since Ajax has had long-term, single-sourcing relationship with most of its customers. In 2018, however, there was a threat of a strike at one of Ajax Inc.’s major raw materials suppliers. For that reason, Ajax management decided to purchase more raw materials and produce more components in 2018 than actually required, in anticipation of raw materials shortages in 2019. Manufacturing equipment

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