Case Study no.

4 on The Greenfield Hills Apartments:

Activity Based Costing in a Service Setting

In Partial Fulfilment of the Course Requirement, in

ACC535M Management Accounting and Control
Term 2 S.Y 2016-2017
Feb 27, 2017

Members:
Groups 1 & 7
Charisse Jollins Ang
Josiah Frances Buenavista
Maricor Cuerdo
Jan Paul Francia
John Paulo Pineda
Leira Angeli Soberano

Submitted to:
Dr. Arnel Uy
I. General Case Background
 A. Rationale
To succeed in today’s marketplace, companies must generate high quality
products or services and have competitive cost structures. Actions taken to create cost
efficiencies require an understanding of the drivers, or underlying causes, of costs and
not just merely recognition of cost predictors. Traditional costing methods usually use
predetermined overhead rates in allocating overhead cost to products and services.
However, there are some alternative methods that executives may use in order to
improve management information and enhance their competitive advantage. One of
these methods is known as Activity Based Costing (ABC). The method allows a more
direct focus on the actions that occur in an organization and the overhead costs that are
created by this actions. If use, ABC can help managers make better decisions about the
design, production, profitability and pricing of products and services.

As defined by Raiborn and Kinney (2011), Activity Based Costing is an

accounting system that focuses on an organization’s activities and collects costs on the
basis of the underlying nature and extent of those activities. ABC focuses on attaching
costs to products and services based on the activities conducted to produce, perform,
distribute and support those products and services. The fundamental components of
ABC costing methods are
● Recognizing that costs are incurred at different levels of the organization
● Accumulating costs into proper cost pools
● Using multiple cost drivers to allocate the costs to products and services.

The case of Greenfield Hills specifically highlights the importance of shifting from
the traditional costing method to ABC in order to generate a more accurate cost
information about their services and in that way, the company will be able to evaluate
their current service offerings and price such services accordingly.

B. Company Profile

In 1989, Springhill Lake Development Corporation built the Greenfield Hills

 Apartments (GHA) in suburban Milwaukee, Wisconsin. It is the largest apartment
complex within a 10-mile radius. GHA was designed to attract young
professionals, and indeed, in 2004 over three-fourths of its resident population
was between the ages of 22 and 40 with a median gross income of
approximately $56,000. Sixty percent of the heads of household were female.
GHA consists of 20 apartment buildings with a total of 700 units -- 470 two-
bedroom apartment homes and 230 one-bedroom apartment homes. In addition,
there is an indoor recreation centre which has a swimming pool, a basketball
court, a large exercise room with state-of-the-art equipment, two tennis courts,
one racquetball court, and two meeting rooms. GHA has had an average
occupancy rate of 85 percent since its opening and currently 1,615 tenants live in
the apartment homes.

Below is the Company’s team involved in its operations.

II. Point of View

For this case, the group will take the point of view of Mike Plaxer, GHA General
Manager, who is in charge of the daily operations off Greenfield Hills Apartment.His
main concern is about the cost of the Recreation Centre and whether the company is
incurring much expense for it.

III. Statement of the Problem

Using ABC method is it more suitable in GHA operations and how does it affect
the company’s profitability and sustainability. To move towards an accurate cost
identification and allocation to different cost objects, should the Company adapt an
Activity Based Costing (ABC) or should it retain a straightforward traditional costing?

IV. Objectives

The group will base the case on the following objectives:

a. To be able to determine on short runs and long runs.if Activity Based

Costing (ABC) system will provide the Company a more accurate
accounting of its costs and provide a more appropriate allocation of costs
to different cost objects
b. To be able to identify, based on ABC system, the allocated cost per
activity for the recreation centre
c. To determine if Activity-based costing can replace the cost effectiveness
of usage in Recreation centres.
d. Determine if Activity-based costing can replace the cost effectiveness of
apartment units both one bedroom and two bedroom units.
e. Determine the different cost drivers that would affect the costing of GHA
the costing method that will provide the company with the necessary
information with regards to outsourcing decisions

V. Areas for Consideration

A. Assumptions

1. Cost objects of Interest are based on the inputs of Mike Plaxer.

2. Based on the case we assumed that cost from maid service fees are not yet
reflected on the costing.
 B. Methodology
1. With the list of nine (9) activities that Single had came up with, we allocated the
cost items. These activities seemed to adequately describe the various
operations occurring at GHA. The cost items are distributed to these activities
either directly, evenly or based on their timesheets.
2. Once all of the costs were assigned to the nine activities, we re-allocated the
costs that had been assigned to “general management” to seven other activities
(except for recreational activities). Plaxer provided for the allocation percentages.
3. Afterwards, we allocated the costs of these seven activities to the one-bedroom
apartments, two-bedroom apartments, and recreation centre using the cost
drivers (i.e., square footage, number of units and residents).
4. Once the total costs for recreation centre were calculated, we assigned to the
five (5) cost objects within the recreation centre the total costs; we used the cost
drivers (i.e., square footage, number of instructors, hours of instruction and
residents) and cost driver data provided by Single.
5. After computing for the total costs and per unit costs that should be assigned to
the one-bedroom apartments, two-bedroom apartments, and the recreation
centre, we checked for the consistency of these costs with the current rental
prices.
6. We also compared the costs supposing GHA had used a traditional costing
system which allocated all of the costs to the two different types of apartment
units and recreation centre using number of residents as the allocation base
against with the costs resulting from the ABC approach.
7. We also determined the total costs assigned to the five cost objects within the
recreation centre and computed for the costs per resident (total population) and
costs per participating resident.

Note: Please see Appendix A for the Working Paper of Greenfield Hills Apartments.

VI. TOWS Analysis

 Threats
● The number of units may not be
sufficient to meet the needs of the
the growing population.
● With the continuous competition
in the industry, competitors may
compete with GHA in terms of
pricing (involving recreational
centre).
● Tenants may look for other
alternatives and leave GHA.
Weaknesses
● GHA has currently no system of
figuring out the cost of the
recreation centre or the apartment
units. Its traditional costing system
focuses on one cost driver and
not on activities.
● Continuous collection of fees for
the recreation centre resulting to
unsatisfied tenants.
Opportunities
● The level of competition is less
intense as GHA is the largest
apartment within the 10-mile
parameter.
● It has a stable market: the presence
of young professionals.
● GHA can turn the recreation centre
to their advantage by means of a
correct market strategy. Their
market position will surely be helpful
on turning this to their advantage.
Strengths
● GHA has a strong market position
being the largest apartment within
the 10-mile radius and is able to
cater the needs of its target market
– the young professionals.
● It has a relatively high occupancy
rate of 85% since its opening.
● GHA has a variety of health and
wellness services in its recreation
centre (i.e., aerobics, karate,
swimming and tennis classes)
available to all tenants.
● GHA maintains a database that
tracks the number of residents by
apartment type and is updated
monthly resulting to ease of
monitoring.
● It offers two types of rooms,
providing options to their
prospective tenants.
● GHA is a company that is open to
accommodate client’s feedback and
is willing to use it for the further
improvement of their system.
VII. Alternative Courses of Actions

ACA 1: To adapt to Activity-Based Costing

Under the ABC method, all the overhead cost incurred by the company are
assigned to different activity cost pools. These costs are then assigned to different cost
objects (1 Bedroom, 2 Bedroom, Recreation Centre) using the appropriate cost drivers.
Kindly see the table below for the allocation process.
ACA 2: To retain a straightforward traditional costing.

Under the traditional costing method, the total overhead cost are allocated to
all the cost objects using a single predetermined overhead rate. In this case, the
number of residents as the allocation base.

VIII. Decision Matrix

The decision criteria and weights below aims to serve as a basis in choosing the
best option with regards to the case. This serve as a guide in determining the most
appropriate accounting method that the company may adopt in order to achieve the
objectives mentioned above.
 Decision Criteria Weight Rationale

Accuracy 40% This criterion aims to

allocate all the overhead
costs as precise as
possible to reflect the true
cost of all the cost objects

Market Acceptance 20% This criterion aims to

consider the acceptability
of each costing strategy’s
result relative to its effect
on the rental price. It aims
to identify which costing
strategy will be more
effective in terms of
pricing.

Comprehensiveness 40% This criterion aims to

provide management a
comprehensive report that
shows all the relevant
information needed for
decision making

Total 100%

Decision Criteria Weight ACA 1 ACA 2

Accuracy 40% 40% 35%

Market Acceptance 20% 15% 20%

Comprehensiveness 40% 38% 30%

Total 100% 93% 85%

XI. Conclusion & Recommendation

 After considering all the information and applying the two costing method
mentioned in the case, we recommend ACA#1 as the best course of action that the
company may adopt in order to meet the objectives as stated above. Although not every
accounting system using the traditional approach to assign overhead costs produces
inaccurate cost information, a great deal of information may be lost in an accounting
system that ignore activity and cost relationship. Application of the ABC system will
bring out indicators that can alert managers in reviewing the cost information provided
by their current system. Several of these indicators are more relevant to manufacturing
entities while others are equally applicable to both manufacturing and service industry.
Indicators to consider may include the following:
● Diversity of products and services
● Diversity and differential degree of support services used for different products
● Extent to which common process are used
● Effectiveness of the company’s current cost allocation methods

IX. Implementation Plan

It is believed that the transition from the traditional costing system to Activity-
based costing (ABC) is relatively difficult. But with the objective of arriving to more
accurate costing and more precise breakdown of indirect costs, the Management opt to
take a leap to ABC approach. Below are some of the considerations during the
transition stage: work breakdown, roles and responsibilities of external vendors and
internal resources and the reporting and communication procedures for the transition
period.

X. Reference:

1. Raiborn, C. A., & Kinney, M. R. (2011). Cost accounting. Singapore: South-

Western Cengage Learning.
2. Hansen, D. R., Heitger, D. L., & Mowen, M. M. (2014). Cornerstones of
managerial accounting (5th ed.). South Western Cengage Learning.