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 $22.55 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)	6,500	hundred square feet
Travel to jobs	Miles driven	78,000	miles
Job suport	Numbr of jobs	2,000	jobs
Other (organization-sustaining costs and idle capacity costs)	None	Not applicable

The total cost of operating the company for the year is $351,000 which includes the following costs:

Wages	$	146,000
Cleaning supplies		28,000
Cleaning equipment depreciation		13,000
Vehicle expenses		26,000
Office expenses		67,000
President’s compensation		71,000
Total cost	$	351,000

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	78	%	15	%	0	%	7	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	68	%	0	%	0	%	32	%	100	%
Vehicle expenses	0	%	85	%	0	%	15	%	100	%
Office expenses	0	%	0	%	57	%	43	%	100	%
President’s compensation	0	%	0	%	27	%	73	%	100	%

Job suport 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 60-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 $90.20 (400 square feet @ $22.55 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

a)	First Stage allocation of cost to activity cost pools.
		Cleaning Carpets	Travel To Job	Job support	Other	Total
	Wages	113,880	21,900	-	10,220	146,000
	Cleaning Supplies	28,000	-	-	-	28,000
	Cleaning equipment Depreciation	8,840	-	-	4,160	13,000
	Vehicle Expense	-	22,100	-	3,900	26,000
	Office Expense	-	-	38,190	28,810	67,000
	President's Compensation	-	-	19,170	51,830	71,000
	Total cost	150,720	44,000	57,360	98,920	351,000
b)	Activity Cost Pool	Activity Cost	Activity for the year	Activity Rate
	Cleaning Carpets	150,720	6,500	23.19	per hundred sq ft
	Travel To Job	44,000	78,000	0.56	per mile driven
	Job support	57,360	2,000	28.68	per job
c)	Calculate Cost of Job using ABC
	Activity Cost Pool	Activity for the Job	Activity Rate	Job allocated to Cost
	Cleaning Carpets	4	23.19	92.76
	Travel To Job	60	0.56	33.60
	Job support	1	28.68	28.68
	Total cost of Job			155.04
d)	Calculate margin from Job
	Revenue from Job	90.20
	Les: Cost allocated to Job	155.04
	Profit/(Loss from Job)	(64.84)