Paints-R-Us Company provides painting services to commercial clients. By tracking overhead costs in an activity-based costing system, the company can assign the proper overhead costs to each completed job and client. The 2012 data from its activity-based costing system is as follows:
Activity Cost Pool Total Cost Total Activity
Painting $264,000 34,800 hours
Job Support $145,000 7,000 jobs
Client support $4,800 220 clients
Other costs $170,000 Not applicable
Total $583,800
The "Other costs" pool consists of organization-sustaining costs.
One of Paints-R-Us' clients contracted for 10 offices to be painted during 2012. This contract required a total of 90 hours of painting. For this contract, the client was charged $2,000.
a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round off all calculations to the nearest whole cent.
b. Using the activity-based costing system, compute the customer margin for Paints-R-Us. Round off all calculations to the nearest whole cent.
c. Assume Paints-R-Us decides instead to use a more traditional costing system in which ALL costs are allocated to customers on the basis of painting hours. Compute the customer margin for Paints-R-Us. Round off all calculations to the nearest whole cent.
d. Which analysis, ABC in part b or traditional in part c, gives a more realistic picture of this client's true profitability? Defend your answer.