Question

allatin 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 $22.60 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 fee cleaned (00s)	11500 hundred square feet
Travel to jobs	Miles driven	67500 miles
Job support	Number of jobs	1700 jobs
Other (organization-sustaining costs and idle capactiy costs)	None	NA

The total cost of operating the company for the year is $366,000 which includes the following costs:

Wages	$                     136,000.00
Cleaning Supplies	$                        32,000.00
Cleaning Equipment depreciation	$                        17,000.00
Vehicle Expenses	$                        33,000.00
Office Expenses	$                        68,000.00
President's Compensation	$                        80,000.00
Total Cost	$                     366,000.00

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%	15%	0%	12%	100%
Cleaning Supplies	100%	0%	0%	0%	100%
Cleaning equipment depreciation	72%	0%	0%	28%	100%
Vehicle Expenses	0%	81%	0%	19%	100%
Office Expenses	0%	0%	65%	35%	100%
President's Compensation	0%	0%	28%	72%	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 600 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 $135.60 (600 square feet @ $22.60 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

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Part 1.
	Cleaning Carpets	Travel to Jobs	Job Support	Other	Total
Wages	$                  99,280	$                20,400	$                                                 -	$       16,320	$          136,000
Cleaning Supplies	$                  32,000	$                          -	$                                                 -	$                -	$             32,000
Cleaning Equipment Dep	$                  12,240	$                          -	$                                                 -	$         4,760	$             17,000
Vehicle Expenses	$                           -	$                26,730	$                                                 -	$         6,270	$             33,000
Office Expenses	$                           -	$                          -	$                                       44,200	$       23,800	$             68,000
Presedint's Compensation	$                           -	$                          -	$                                       22,400	$       57,600	$             80,000
Total Cost	$                143,520	$                47,130	$                                       66,600	$     108,750	$          366,000
Part 2.
Activity Cost Pool	Total Cost	Yearly Activities	Activity Rate
			Total Cost/Yearly Activities
Cleaning Carpets	$                143,520	11500	$                                          12.48
Travel to Jobs	$                  47,130	67500	$                                            0.70
Job Support	$                  66,600	1700	$                                          39.18
Part 3.
Activity Cost Pool	Activity Rate	No of Activities	Cost of the Job
	A	B	A*B
Cleaning Carpets	$                    12.48	6	$                                          74.88
Travel to Jobs	$                       0.70	59	$                                          41.20
Job Support	$                    39.18	1	$                                          39.18
Total Cost			$                                       155.25
Part 4.
Revenue		$                135.60
Less: Cost of the Job
Cleaning Carpets	$                    74.88
Travel to Jobs	$                    41.20
Job Support	$                    39.18
Total Cost		$                155.25
Loss		$                 -19.65