Question

In: Accounting

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $23.85 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below:

Activity Cost Pool Activity Measure Activity for the Year
Cleaning carpets Square feet cleaned (00s) 9,500 hundred square feet
Travel to jobs Miles driven 235,500 miles
Job support Number of jobs 1,600 jobs
Other (organization-sustaining costs and idle capacity costs) None Not applicable

The total cost of operating the company for the year is $347,000 which includes the following costs:

Wages $ 140,000
Cleaning supplies 34,000
Cleaning equipment depreciation 7,000
Vehicle expenses 28,000
Office expenses 61,000
President’s compensation 77,000
Total cost $ 347,000

Resource consumption is distributed across the activities as follows:

Distribution of Resource Consumption Across Activities
Cleaning Carpets Travel to Jobs Job Support Other Total
Wages 72 % 11 % 0 % 17 % 100 %
Cleaning supplies 100 % 0 % 0 % 0 % 100 %
Cleaning equipment depreciation 66 % 0 % 0 % 34 % 100 %
Vehicle expenses 0 % 81 % 0 % 19 % 100 %
Office expenses 0 % 0 % 65 % 35 % 100 %
President’s compensation 0 % 0 % 33 % 67 % 100 %

Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Required:

1. Prepare the first-stage allocation of costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools.

3. The company recently completed a 400 square foot carpet-cleaning job at the Flying N ranch—a 53-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system.

4. The revenue from the Flying N ranch was $95.40 (400 square feet @ $23.85 per hundred square feet). Calculate the customer margin earned on this job.

Complete this question by entering your answers in the tabs below.

  • Required 1
  • Prepare the first-stage allocation of costs to the activity cost pools
  • Cleaning Job
    Carpets Travel to Jobs Support Other Total
    Wages $0
    Cleaning supplies 0
    Cleaning equipment depreciation 0
    Vehicle expenses 0
    Office expenses 0
    President’s compensation 0
    Total cost $0 $0 $0 $0 $0
  • Required 2
  • Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.)

    Activity Cost Pool Activity Rate
    Cleaning carpets per hundred square feet
    Travel to jobs per mile
    Job support per job
  • Required 3
  • The company recently completed a 400 square foot carpet-cleaning job at the Flying N ranch—a 53-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system. (Round your intermediate calculations and final answer to 2 decimal places.)

    Cost of the job
  • Required 4
  • The revenue from the Flying N ranch was $95.40 (4 hundred square feet @ $23.85 per hundred square feet). Calculate the customer margin earned on this job. (Round your intermediate calculations and final answers to 2 decimal places.)

    Customer margin

Solutions

Expert Solution

1
Cleaning Carpets Travel to Jobs Job support Other Total
Wages 100800 15400 0 23800 140000
Cleaning supplies 34000 0 0 0 34000
Cleaning equipment depreciation 4620 0 0 2380 7000
Vehicle expenses 0 22680 0 5320 28000
Office expense 0 0 39650 21350 61000
President’s compensation 0 0 25410 51590 77000
Total cost 139420 38080 65060 104440 347000
2
Activity Cost Pool Activity Rate   
Cleaning carpets 14.68 per hundred square feet =139420/9500
Travel to jobs 0.16 per mile =38080/235500
Job support 40.66 per job =65060/1600
3
Activity Cost Pool Activity Rate    Activity Total
Cleaning carpets 14.68 4 58.72
Travel to jobs 0.16 53 8.48
Job support 40.66 1 40.66
107.86
Cost of the job 107.86
4
Customer Margin—Activity-Based Costing
Sales 95.40
Costs:
Cleaning carpets 58.72
Travel to jobs 8.48
Job support 40.66 107.86
Customer margin -12.46

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