Prairie Landscaping has enjoyed profits for many years, but new competition has cut service revenue by as much as 30%. As a result, the company wants to better understand its costs. It decides to prepare an activity based cost analysis, including an estimate of the average cost of both general landscaping services and custom design landscaping services. The company’s three cost centers and their cost drivers follow.
|
Cost Center |
Cost |
Cost Driver |
Driver Quantity |
|
Professional salaries |
$500,000 |
Professional hours |
10,000 |
|
Customer supplies |
125,000 |
Number of customers |
500 |
|
Building cost |
150,000 |
Square feet |
1,500 |
The two main landscaping units and their related data follow.
|
Service |
Hours |
Square Feet* |
Customers |
|
General landscaping |
2,500 |
500 |
400 |
|
Custom design landscaping |
7,500 |
1,000 |
100 |
Required
1. Compute the cost per cost driver for each of the three cost centers.
2. Use the results from part 1 to allocate costs from each of the three cost centers to both the general landscaping and the custom design landscaping units. Compute total cost and average cost per customer for both the general landscaping and the custom design landscaping units.
3. Without providing computations, would the average cost of general landscaping be higher or lower if all center costs were allocated based on the number of customers? Explain.