Wednesday, 1 April 2015

Green Thumb Gardening is a small gardening service that uses activity-based costing to estimate costs for pricing and other purposes.

Green Thumb Gardening is a small gardening service that uses activity-based costing to estimate costs for pricing and other purposes. The proprietor of the company believes that costs are driven primarily by the size of customer lawns, the size of customer garden beds, the distance to travel to customers, and the number of customers. In addition, the costs of maintaining garden beds depends on whether the beds are low maintenance beds (mainly ordinary trees and shrubs) or high maintenance beds (mainly flowers and exotic plants). Accordingly, the company uses the five activity cost pools listed below:
 
  Activity Cost Pool Activity Measure                        
  Caring for lawn   Square feet of lawn
  Caring for garden beds–low maintenance   Square feet of low maintenance beds
  Caring for garden beds–high maintenance   Square feet of high maintenance beds
  Travel to jobs   Miles
  Customer billing and service   Number of customers

 
The company has already completed its first stage allocations of costs and has summarized its annual costs and activity as follows:
 
  Activity Cost Pool Estimated
Overhead
Cost
Expected Activity                          
  Caring for lawn $ 88,200     190,000  square feet of lawn
  Caring for garden beds–low maintenance $ 40,800     23,000  square feet of low maintenance beds
  Caring for garden beds–high maintenance $ 47,090     17,000  square feet of high maintenance beds
  Travel to jobs $ 5,000     14,000  miles
  Customer billing and service $ 10,300     34  customers

 
Required:
Compute the activity rate for each of the activity cost pools.
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Explanation:
  Activity Cost Pool Estimated
Overhead
Cost
            Expected Activity                Activity Rate
  Caring for lawn $ 88,200    190,000  square feet of lawn   $ 0.46  per square foot of lawn
  Caring for garden beds–low
     maintenance
$ 40,800    23,000  square feet of low  maintenance beds   $ 1.77  per square foot of low  maintenance beds
  Caring for garden beds–high
     maintenance
$ 47,090    17,000  square feet of high  maintenance beds   $ 2.77  per square foot of high  maintenance beds
  Travel to jobs $ 5,000    14,000  miles   $ 0.36  per mile
  Customer billing and service $ 10,300    34  customers   $ 302.94  per customer

 
The activity rate for each activity cost pool is computed by dividing its estimated overhead cost by its expected activity.