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 $22.65 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, a simple system consisting of four activity cost pools seemed to be adequate. 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) 14,500 hundred square feet
  Travel to jobs Miles driven 231,500 miles
  Job support Number of jobs 1,700 jobs
  Other (costs of idle capacity and
    organization-sustaining costs)
None Not applicable


     The total cost of operating the company for the year is $358,000, which includes the following costs:


  Wages $ 138,000   
  Cleaning supplies 29,000   
  Cleaning equipment depreciation 19,000   
  Vehicle expenses 34,000   
  Office expenses 57,000   
  President’s compensation 81,000   
  Total cost $ 358,000   


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 80 % 14 % 0 % 6 % 100 %
  Cleaning supplies 100 % 0 % 0 % 0 % 100 %
  Cleaning equipment depreciation 66 % 0 % 0 % 34 % 100 %
  Vehicle expenses 0 % 80 % 0 % 20 % 100 %
  Office expenses 0 % 0 % 58 % 42 % 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. (Round your answers to 2 decimal places.)

      

3.

The company recently completed a 6 hundred square foot carpet-cleaning job at the Flying N ranch—a 56.00-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 and final answers to 2 decimal places.)

      

4.

The revenue from the Flying N ranch was $135.90 (6 hundred square feet at $22.65 per hundred square feet). Prepare a report showing the margin from this job. (Round your intermediate calculations and final answers to 2 decimal places.)

     

Solutions

Expert Solution

1
Cleaning Carpets Travel to Jobs Job support Other Total
Wages 110400 19320 0 8280 138000
Cleaning supplies 29000 0 0 0 29000
Cleaning equipment depreciation 12540 0 0 6460 19000
Vehicle expenses 0 27200 0 6800 34000
Office expense 0 0 33060 23940 57000
President’s compensation 0 0 25110 55890 81000
Total cost 151940 46520 58170 101370 358000
2
Activity Cost Pool Activity Rate   
Cleaning carpets 10.48 per hundred square feet =151940/14500
Travel to jobs 0.20 per mile =46520/231500
Job support 34.22 per job =58170/1700
3
Activity Cost Pool Activity Rate    Activity Total
Cleaning carpets 10.48 6 62.88
Travel to jobs 0.20 56 11.20
Job support 34.22 1 34.22
108.30
Cost of this job $108.30
4
Customer Margin—Activity-Based Costing
Sales 135.90
Costs:
Cleaning carpets 62.88
Travel to jobs 11.20
Job support 34.22 108.30
Customer margin 27.60

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