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 $23.40 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)	9,000 Hundred Square Feet
Travel to Jobs	Miles Driven	354,000 Miles
Job Support	Number of Jobs	1,900 Jobs
Other (Costs of Idle capacity and organization-sustaining costs	None	Not Applicable

The total cost of operating the company for the year is $352,000, which includes the following costs:

Wages	$136,000
Cleaning Supplies	$34,000
Cleaning equipment depriciation	$14,000
Vehicle expenses	$26.000
Office expenses	$61,000
President's Compensation	$81,000
Total Cost	$352,000

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	75%	16%	0%	9%	100%
Cleaning Supplies	100%	0%	0%	0%	100%
Cleaning Equipment Depriciation	73%	0%	0%	27%	100%
Vehicle Expense	0%	75%	0%	25%	100%
Office Expense	0%	0%	61%	39%	100%
President's compensation	0%	0%	33%	67%	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 answer to 2 decimal places)

3. The company recently completed a 4 hundred square foot carpet-cleaning job at the Flying N ranch—a 54.00-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 $93.60 (4 hundred square feet at $23.40 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. First-stage allocation of costs to the activity cost pools
	Cleaning Carpets	Travel to Jobs	Job Support	Other	Total			Cleaning Carpets	Travel to Jobs	Job Support	Other	Total
Wages	75%	16%	0%	9%	100%	Wages	1,36,000	1,02,000	21,760	-	12,240	1,36,000
Cleaning Supplies	100%	0%	0%	0%	100%	Cleaning Supplies	34,000	34,000	-	-	-	34,000
Cleaning Equipment Depriciation	73%	0%	0%	27%	100%	Cleaning equipment depriciation	14,000	10,220	-	-	3,780	14,000
Vehicle Expense	0%	75%	0%	25%	100%	Vehicle expenses	26000	-	19,500	-	6,500	26,000
Office Expense	0%	0%	61%	39%	100%	Office expenses	61,000	-	-	37,210	23,790	61,000
President's compensation	0%	0%	33%	67%	100%	President's Compensation	81,000	-	-	26,730	54,270	81,000
						Total Cost	3,52,000	1,46,220	41,260	63,940	1,00,580	3,52,000
						2. Compute the activity Rates for the activity cost pools
								9000	354000	1900
	Cost of this per job using the activity-based costing system							16.25	0.12	33.65	#DIV/0!
								4	54
	3. Cost of this job using the activity-based costing system							64.99	6
								93.60
	4. Margin from this job							28.61