Waterways Continuing Problem

$($This is a continuation of the Waterways Problem from Chapters $1$ through $4.)$

WCP$.5$ 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.$\backslash$table$[[$Activity Cost Pools,Cost Drivers,$\backslash$table$[[$Estimated$],[$Overhead$]],\backslash$table$[[$Estimated Use$],[$per Activity$]]],[$Supervision$,$ security, maintenance,Number of workdays,$$450,000,1,500],[$Liability insurance,Number of employees,$100,000,800],[$Equipment costs,Hours of operation,$90,000,12,000],[$Indirect supplies and delivery,Length in metres,$250,000,250,000],[$Employee benefits,Direct labour cost,$150,000,$$$600,000$