Question

In: Accounting

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...

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 $22.85 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) 13,000 hundred square feet
Travel to jobs Miles driven 190,000 miles
Job support Number of jobs 2,000 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 $ 141,000
Cleaning supplies 24,000
Cleaning equipment depreciation 11,000
Vehicle expenses 26,000
Office expenses 70,000
President’s compensation 81,000
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 74 % 14 % 0 % 12 % 100 %
Cleaning supplies 100 % 0 % 0 % 0 % 100 %
Cleaning equipment depreciation 69 % 0 % 0 % 31 % 100 %
Vehicle expenses 0 % 78 % 0 % 22 % 100 %
Office expenses 0 % 0 % 60 % 40 % 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.

3. The company recently completed a 200 square foot carpet-cleaning job at the Flying N Ranch—a 53-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 $45.70 (200 square feet @ $22.85 per hundred square feet). Calculate the customer margin earned on this job.

Solutions

Expert Solution

Requirement 1
Cleaning Travel to job other total
carpets jobs support
Wages 104340 19740 16920 141000
Cleaning supplies 24000 24000
Cleaning Equipment depreciation 7590 3410 11000
Vechicle expenses 20280 5720 26000
office expenses 42000 28000 70000
presidents compensation 25110 55890 81000
total cost 135930 40020 67110 109940 353000
Requirement 2
Activity cost pool Activity rate
Cleaning carpets 10.46 per hundered square feet
Travel to jobs 0.21 per mile
job support 33.56 per job
Requirement 3
Cost of the job 65.61
(2*10.46 +53*.21+33.56)
Requirement 4
Customer margin-Activity Based
Sales 45.7
Costs:
Cleaning carpets 20.92
Travel to jobds 11.13
job support 33.56
65.61
Customer margin -19.91 answer

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