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 $22.95 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) 7,000 hundred square feet
Travel to jobs Miles driven 202,500 miles
Job support Number of jobs 1,800 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 $ 143,000
Cleaning supplies 21,000
Cleaning equipment depreciation 12,000
Vehicle expenses 29,000
Office expenses 57,000
President’s compensation 85,000
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 77 % 13 % 0 % 10 % 100 %
Cleaning supplies 100 % 0 % 0 % 0 % 100 %
Cleaning equipment depreciation 72 % 0 % 0 % 28 % 100 %
Vehicle expenses 0 % 77 % 0 % 23 % 100 %
Office expenses 0 % 0 % 56 % 44 % 100 %
President’s compensation 0 % 0 % 32 % 68 % 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 200 square foot carpet-cleaning job at the Flying N Ranch—a 51-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 $45.90 (200 square feet @ $22.95 per hundred square feet). Calculate the customer margin earned on this job.

Solutions

Expert Solution

1
Cleaning Carpets Travel to Jobs Job support Other Total
Wages 110110 18590 0 14300 143000
Cleaning supplies 21000 0 0 0 21000
Cleaning equipment depreciation 8640 0 0 3360 12000
Vehicle expenses 0 22330 0 6670 29000
Office expense 0 0 31920 25080 57000
President’s compensation 0 0 27200 57800 85000
Total cost 139750 40920 59120 107210 347000
2
Activity Cost Pool Activity Rate   
Cleaning carpets 19.96 per hundred square feet =139750/7000
Travel to jobs 0.20 per mile =40920/202500
Job support 32.84 per job =59120/1800
3
Activity Cost Pool Activity Rate    Activity Total
Cleaning carpets 19.96 2 39.92
Travel to jobs 0.20 51 10.20
Job support 32.84 1 32.84
82.96
Cost of the job $82.96
4
Customer Margin—Activity-Based Costing
Sales 45.90
Costs:
Cleaning carpets 39.92
Travel to jobs 10.20
Job support 32.84 82.96
Customer margin -37.06

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