ABC is a medium-sized Australian city. The relevant local government is the ABC City Council, which...

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ABC is a medium-sized Australian city. The relevant local government is the ABC City Council, which collects rates and provides the usual range of services provided by Australian local governments. In recent years, the ABC City Council has been criticised by ratepayers for the annual rubbish collection and disposal fee that it charges residential property owners. Each residential property is charged $500 to cover the cost of weekly rubbish collection and disposal. At a meeting of the Council, one rate payer stated:

Why do we have to pay $500 per year just to have our rubbish collected and disposed of? All someone does is drive around in a truck that picks up the bin and empties it into the truck! How can that cost $500 per house per year? We are all being ripped off! It is obvious that the rubbish collection fee is being used to pay for other things – like the Council’s Arts Festival!

One of the Councillors was sympathetic with this view and made the following comment:

I agree that we should not be using the rubbish collection fee as a general revenue raising measure. What we should do is find out the exact cost of collecting and disposing of rubbish from a residential address, and then set that as the annual fee. We will then be able to tell ratepayers that they are being charged the exact cost of having their rubbish collected and disposed of, and that ABC City Council makes no profit from providing this service. As a first step, I would like the Management Accountant of ABC City Council to calculate the exact cost of collecting and disposing of rubbish from a residential address for this year. We can then set that as the rubbish collection and disposal fee, and if we receive any criticism from ratepayers we will be able to show them the calculation and prove that we make no profit from providing this service.

Assume that you are the Management Accountant of ABC City Council and answer the following questions:

1. How would you go about calculating the “exact cost of collecting and disposing of rubbish from a residential address” for one year? In answering this question, you should ensure that you consider what costs would be included in (and what costs excluded from) your calculation. (6 marks)

2. What difficulties would expect to encounter in making your calculations? In answering this question you should ensure that you identify any subjective aspects of your calculations, and also consider whether the Councillor’s request to find the “exact” cost is realistic. (6 marks)

Robert · Accepted Answer

ANSWER 1 
Following are three steps in calculating exact cost of collection and disposal from a residential 
address for the year- 
STEP 1 – IDENTIFY ANNUAL COSTS RELEVANT FOR THIS PURPOSE 
There is a need to identify the costs to be included in the cost of collection and disposal of 
rubbish. Broadly the costs involved here are of two kinds  
1. Direct costs of collection and disposal 
2.  Indirect costs 
DIRECT COSTS – It includes all the costs involved in collection and disposal. They are 
apparently explicit costs which even a layman can understand. It includes the fuel used in 
vehicles used to carry garbage, wages of the workers engaged in such collection, equipment used 
by such staff like gloves to avoid infection. The direct costs will normally not exceed $500 per 
household in the year. 
INDIRECT COSTS – it includes all the other costs like supervisor salaries, truck repairs, 
depreciation, overheads, environmental costs (cost of restoring environment at the place of 
disposal), rent of land used to keep and destroy garbage, disinfectants used to remain safe from 
diseases arising from garbage, medical costs for injuries to labor dealing with garbage, interest 
costs for debt funds related to garbage disposal activities and other overheads. Apparently, the 
comments of the rent payer indicate ignorance about any of such indirect costs as he only 
referred to the cost of picking garbage and putting into the truck as the matter of prime concern. 
Irrelevant Costs-  In making such computations, some costs may be ignored like losses of 
previous year should not be included. The costs related to events like the Arts festival should not 
be included here unless that festival dealt with some activities related to promotion of safe 
garbage collection activities.

ABC is a medium-sized Australian city. The relevant local government is the ABC City Council, which collects rates and provides the usual range of services provided by Australian local governments. In...

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