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 $23.55 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) 11,500 hundred square feet Travel to jobs Miles driven 241,000 miles Job support Number of jobs 1,900 jobs Other (organization-sustaining costs and idle capacity costs) None Not applicable

The total cost of operating the company for the year is $353,000 which includes the following costs: Wages $ 144,000 Cleaning supplies 26,000 Cleaning equipment depreciation 14,000 Vehicle expenses 26,000 Office expenses 58,000 President’s compensation 85,000 Total cost $ 353,000 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 % 15 % 0 % 6 % 100 % Cleaning supplies 100 % 0 % 0 % 0 % 100 % Cleaning equipment depreciation 75 % 0 % 0 % 25 % 100 % Vehicle expenses 0 % 82 % 0 % 18 % 100 % Office expenses 0 % 0 % 56 % 44 % 100 % President’s compensation 0 % 0 % 30 % 70 % 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 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 $141.30 (600 square feet @ $23.55 per hundred square feet). Calculate the customer margin earned on this job. This is the last question in the assignment. To submit, use Alt + S. To access other questions, proceed to the question map button.Next Visit question mapQuestion 9 of 9 Total9 of 9

Answer 1

1.

2.

Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
Cleaning Carpets	$1,50,260.00	Square feet cleaned	11500	$13.07
Travel to Jobs	$42,920.00	Miles driven	241000	$0.18
Job Support	$57,980.00	Nos of jobs	1900	$30.52

3.

Computation of Job Cost
Particulars	Amount
Cleaning Carpet (6*$13.07)	$78.42
Travel to Jobs (58*$0.18)	$10.44
Job Support	$30.52
Total Cost	$119.38

4.

Customer Margin - Activity based costing
Particulars		Amount
Revenue		$141.30
Costs:
Cleaning Carpet	$78.42
Travel to Jobs	$10.44
Job Support	$30.52
Total Cost		$119.38
Customer Margin		$21.92