Question

Problem 7-20 Evaluating the Profitability of Services [LO7-2, LO7-3, LO7-4, LO7-5]

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 $23.95 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)	9,000	hundred square feet
Travel to jobs	Miles driven	285,500	miles
Job support	Number of jobs	2,100	jobs
Other (organization-sustaining costs and idle capacity costs)	None	Not applicable

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

Wages	$	146,000
Cleaning supplies		33,000
Cleaning equipment depreciation		13,000
Vehicle expenses		28,000
Office expenses		61,000
President’s compensation		85,000
Total cost	$	366,000

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	79	%	13	%	0	%	8	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	68	%	0	%	0	%	32	%	100	%
Vehicle expenses	0	%	79	%	0	%	21	%	100	%
Office expenses	0	%	0	%	57	%	43	%	100	%
President’s compensation	0	%	0	%	29	%	71	%	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 800 square foot carpet-cleaning job at the Flying N Ranch—a 58-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 $191.60 (800 square feet @ $23.95 per hundred square feet). Calculate the customer margin

numbers 1, 2, and 3 I got. I just cant find number 4. I always seem to have a hard time with customer margin! Thanks for all the help

Answer 1

Solution-1
Distribution of Resource consumption across activities
Particulars	Total cost	Cleaning carpets	Travel to Jobs	Job Support	Other	Total
Wages	1,46,000	79%	13%	0%	8%	100%
Cleaning supplies	33,000	100%	0%	0%	0%	100%
Cleaning equipment depreciation	13,000	68%	0%	0%	32%	100%
Vehicle expenses	28,000	0%	79%	0%	21%	100%
Office expenses	61,000	0%	0%	57%	43%	100%
President's compensation	85,000	0%	0%	29%	71%	100%
	3,66,000
First-stage allocation of costs to the activity cost pools
	Cleaning carpets	Travel to Jobs	Job Support	Other	Total
Wages	1,15,340	18,980	-	11,680	1,46,000
Cleaning supplies	33,000	-	-	-	33,000
Cleaning equipment depreciation	8,840	-	-	4,160	13,000
Vehicle expenses	-	22,120	-	5,880	28,000
Office expenses	-	-	34,770	26,230	61,000
President's compensation	-	-	24,650	60,350	85,000
Activity Cost Pool	1,57,180	41,100	59,420	1,08,300	3,66,000
Solution-2
Activity Cost Pool	Activity Measure	Activity for the Year (A)		Activity Cost Pool (B)	Activity Rates (B)÷(A)
Cleaning carpets	Square feet cleaned (00s)	9,000	hundred square feet	1,57,180	17.46
Travel to jobs	Miles driven	2,85,500	miles	41,100	0.14
Job support	Number of jobs	2,100	jobs	59,420	28.30
Solution-3
Computation of cost of this job using the activity-based costing system
Activity Cost	Activity for the job	Activity Rates	Total cost
Cleaning carpets	800	17.46	140
Travel to jobs	58	0.14	8
			148
Solution-4
Computation of customer margin
Revenue from the Flying N Ranch	191.60
Total cost	147.72
Customer margin	43.88