Question

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

Answer 1

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