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 $22.65 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.)

     

Answer 1

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