Costing Report for Super Clean

 Costing Report for Super Clean

Super Clean is a service company that provides commercial and residential cleaning services. An organization uses a costing system in which overhead is distributed on the basis of uninterrupted working time. Therefore, the company uses the number of labor hours to calculate the overhead rate. However, the company has realized that the traditional costing method of allocating overhead is inaccurate. The reason for this is that gas and depreciation costs do not vary with direct labor. Therefore, the company wants to use the activity-based-costing system to allocate the values of the receptionist, office supplies, gas and car usage (depreciation) to get more accurate cost estimates. The information generated from ABC costing is expected to help management to give more accurate quotes and improve the company’s profitability.

The current report calculates the overhead rate using the plantwide method (one rate), as well as the overhead valuations for each activity, cost pool for commercial and residential cleanings.  This information is used to estimate the total overhead costs and overhead cost per unit hour for each job. The report also estimates total costs, which include direct labor and material, as well as the total cost per unit for position one and two. Job 1 refers to residential cleaning while position 2 denotes commercial cleaning. Finally, the report lists and explains three benefits and two disadvantages of ABC systems.

1. Overhead Rate using the Plantwide Method (One Rate)

According to Warren, Reeve, and Duchac (2016, p. 889; 2017, p. 151) and Drury (2008, p. 52), overhead Rate using the Plantwide Method = Total Overhead Costs /Total Direct Labour Hours. 

Total Overhead Costs = $98,000 

Total Direct Labour Hours = Direct Hours (Commercial) + Direct Hour (Residential)

                                           = (10,000 + 10,000) + (6,000 + 6,000) =20,000 + 12,000 = 32,000

Overhead Rate using the Plantwide Method = $98,000/32,000

 = $3.06 per Direct Labour Hour

Therefore, the overhead rate using the plantwide method is $3.06 per labour hour.

2. Overhead Rate using the Plantwide Method (One Rate2. Overhead Rate using the Departmental Method (Two Rates)

Commercial
Total Overhead Costs = $42,500

Total Direct Labour Hours = Direct Hours Commercial = 10,000 + 10,000 =20,000

Overhead Rate using the Departmental Method = $42,500/20,000

= $2.13 per Direct Labour Hour

Residential
Total Overhead Costs = $55,500

Total Direct Labour Hours = Direct Hours Residential = 6,000 + 6,000 =12,000

Overhead Rate using the Departmental Method = $55,500/12,000

= $4.63 per Direct Labour Hour

3. Overhead Rates for each Activity Cost Pool for Commercial and Residential Cleanings

 

Activity Cost Pool	Commercial Cleaning	 	Residential Cleaning
Gas	
$0.13/KM

($13,000/100,000KM)

 	
$0.13/KM

($19,500/150,000KM)

Depreciation	
$0.15/KM

$15,000/100,000KM)

 	
$0.15/KM

$22,500/150,000KM)

 

4. Total Overhead Costs and Overhead Cost per Unit Hour for Each Job

 

Total Overhead Costs
 

Activity Cost Pool	Commercial Cleaning	 	Residential Cleaning
Gas	$213 (100 KM × 2.13)	 	$695 (150 KM× 4.63)
Depreciation	$213 (100 KM × 2.13)	 	$695 (150 KM× 4.63)
Total Overhead Cost per Unit	$430.26	 	$1,399.26
 

Overhead Cost per Unit Hour for Each Job
 

Activity Cost Pool	Commercial Cleaning	 	Residential Cleaning
Receptionist	
$2.13

[$42.500/(10,000 + 10,000)]

 	
$4.63

[$55,500/(6,000 + 6,000)]

Office supplies	
$2.13

[$42.500/(10,000 + 10,000)]

 	
$4.63

[$55,500/(6,000 + 6,000)]

 

5. Total Costs, including Direct Labour and Material and Total Cost per Unit for Job 1 (Residential) and Job 2 (Commercial)

 

Cost Item	Job 1 (Residential)	Job 2 (Commercial)
Direct labour	$2,000 (100 hours × $20)	$3,600 (180 hours × $20)
Cleaning materials	10 litres (100 hours × 0.1)	36 litres (180 hours × 0.2)
Direct material cost	$55 (10 × $5.5)	$198 (36 $5.5)
Cost of fuel	$8,800 (1,600 KM × $5.5)	$ 5,500 (1,000 KM × $5.5)
Depreciation	$880 (1,600 KM × 0.1 × $5.5)	$1,100 (1,100 KM × 0.1 × $5.5)
Total Cost	$11,735	$10,398
 

 	Job 1 (residential)	Job 2 (commercial)
Fixed costs (overhead)	 	 
Receptionist	2000.00	3600.00
Office supplies	55.00	198.00
Gas	8800.00	5500.00
Depreciation	880.00	1100.00
Total	11735.00	10398.00
Overhread cost per unit	6.86	8.19
Variable costs	 	 
Direct labour	2055.00	3798.00
Direct material	9680.00	6600.00
Total	 	 
Total costs	11735.00	10398.00
Total costs per unit	7.33	10.40
 

6. Benefits and Disadvantages of ABC Systems

Benefits
Activity Based Costing System (ABC) enhances accuracy in costing various product lines (Maingi, 2013). With ABC, the overhead of products and processes is easier to track to determine how the overall organizational resources are allocated to specific cost factors. (Weygandt, Kieso, & Kimmel, 2010, p. 161).