Question

Hello. Please answer all my all questions.

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 $23.95 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)	9,000	hundred square feet
Travel to jobs	Miles driven	110,500	miles
Job support	Number of jobs	2,100	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	$	145,000
Cleaning supplies		26,000
Cleaning equipment depreciation		11,000
Vehicle expenses		33,000
Office expenses		65,000
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	70	%	15	%	0	%	15	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	73	%	0	%	0	%	27	%	100	%
Vehicle expenses	0	%	81	%	0	%	19	%	100	%
Office expenses	0	%	0	%	60	%	40	%	100	%
President’s compensation	0	%	0	%	34	%	66	%	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 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 $95.80 (400 square feet @ $23.95 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	101500	21750	0	21750	145000
Cleaning supplies	26000	0	0	0	26000
Cleaning equipment depreciation	8030	0	0	2970	11000
Vehicle expenses	0	26730	0	6270	33000
Office expense	0	0	39000	26000	65000
President’s compensation	0	0	24140	46860	71000
Total cost	135530	48480	63140	103850	351000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	15.06	per hundred square feet	=135530/9000
Travel to jobs	0.44	per mile	=48480/110500
Job support	30.07	per job	=63140/2100
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	15.06	4	60.24
Travel to jobs	0.44	51	22.44
Job support	30.07	1	30.07
			112.75
Cost of this job $112.75
4
	Customer Margin—Activity-Based Costing
Sales		95.80
Costs:
Cleaning carpets	60.24
Travel to jobs	22.44
Job support	30.07	112.75
Customer margin		(16.95)