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Chapter 3

Q. 3.5

The Cascade Cleaning Service in Fallbrook provides cleaning services for commercial buildings. The company cleans three different buildings:

Square Meters Estimated Hours of Cleaning Time
Anderson Office Building  100,000 8,000
Carla’s Pizza 10,000 6,000
Town Hall 90,000 6,000
Total 200,000 20,000

Cascade Cleaning Service has the following estimated indirect costs:

Supplies $50,000
Administration 50,000
Total 100,000

Apply these indirect costs to the different buildings using both square meters and estimated hours of cleaning time. Which application procedure is better?

Step-by-Step

Verified Solution

If square meters are used, the application rate is $100,000/200,000 square meters, or $0.50 per square meter. Using this application rate, the application of estimated indirect costs follows:

Square Meters Application Rate Estimated Indirect Costs
Anderson Office Building  100,000 $0.50 $50,000
Carla’s Pizza 10,000 0.5 5,000
Town Hall 90,000 0.5 45,000
Total applied costs $100,000

If estimated hours of cleaning are used, the application rate is $100,000/20,000 hours, or $5.00 per hour of cleaning. Using this application rate, the application of estimated indirect costs is as follows:

Estimated Hours Application Rate Estimated Indirect Costs
Anderson Office Building € 8,000 $5.00 $40,000
Carla’s Pizza 6,000 5 30,000
Town Hall 6,000 5 30,000
Total applied costs $100,000

Insufficient evidence is available to determine which application procedure is better. The goal is to apply indirect costs to approximate the costs of using the indirect resources. The cost of using supplies is probably associated more closely with the hours of cleaning time, although the cost of floor wax could be associated more closely with the square meters of floor space. The administrative cost may be fixed and common to all the cleaning jobs and does not represent a cost of providing a specific cleaning job. The administrative costs would have to be analyzed more carefully to determine if they represent costs of individual cleaning service jobs. If not, the administrative costs  should not be applied to the different cleaning service jobs to estimate indirect costs.