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 $23.55 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) 12,500 hundred square feet Travel to jobs Miles driven 287,500 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 $359,000 which includes the following costs: Wages $ 144,000 Cleaning supplies 28,000 Cleaning equipment depreciation 8,000 Vehicle expenses 39,000 Office expenses 59,000 President’s compensation 81,000 Total cost $ 359,000 ________________________________________ 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 73 % 13 % 0 % 14 % 100 % Cleaning supplies 100 % 0 % 0 % 0 % 100 % Cleaning equipment depreciation 71 % 0 % 0 % 29 % 100 % Vehicle expenses 0 % 81 % 0 % 19 % 100 % Office expenses 0 % 0 % 63 % 37 % 100 % President’s compensation 0 % 0 % 31 % 69 % 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 59-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 $47.10 (200 square feet @ $23.55 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	105120	18720	0	20160	144000
Cleaning supplies	28000	0	0	0	28000
Cleaning equipment depreciation	5680	0	0	2320	8000
Vehicle expenses	0	31590	0	7410	39000
Office expense	0	0	37170	21830	59000
President’s compensation	0	0	25110	55890	81000
Total cost	138800	50310	62280	107610	359000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	11.10	per hundred square feet	=138800/12500
Travel to jobs	0.17	per mile	=50310/287500
Job support	34.60	per job	=62280/1800
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	11.10	2	22.20
Travel to jobs	0.17	59	10.03
Job support	34.60	1	34.60
			66.83
Cost of this job $66.83
4
	Customer Margin—Activity-Based Costing
Sales		47.10
Costs:
Cleaning carpets	22.20
Travel to jobs	10.03
Job support	34.60	66.83
Customer margin		(19.73)