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 $22.30 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 foot cleaned	10,000 hundred square feet
travel to jobs	miles driven	304,500 miles
job support	number of jobs	1,700 jobs
other (organizational sustaining costs and idle capacity costs	none	n/a

The total cost of operating the company for the year is $335,000 which includes the following costs:

Wages $ 146,000

Cleaning supplies 21,000

Cleaning equipment depreciation 12,000

Vehicle expenses 27,000

Office expenses 58,000

President’s compensation 71,000

Total cost $ 335,000

Resource consumption is distributed across the activities as follows:

	cleaning carpets	travel to jobs	job support	other	total
wages	75%	12%	0	13%	100%
cleaning supplies	100%	0	0	0	100%
cleaning equipment depreciation	74%	0	0	26%	100%
vehicle expenses	0	77%	0	23%	100%
offices expenses	0		56%	44%	100%
presidents compensation	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.

3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch—a 57-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 $133.80 (600 square feet @ $22.30 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	109500	17520	0	18980	146000
Cleaning supplies	21000	0	0	0	21000
Cleaning equipment depreciation	8880	0	0	3120	12000
Vehicle expenses	0	20790	0	6210	27000
Office expense	0	0	32480	25520	58000
President’s compensation	0	0	23430	47570	71000
Total cost	139380	38310	55910	101400	335000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	13.94	per hundred square feet	=139380/10000
Travel to jobs	0.13	per mile	=38310/304500
Job support	32.89	per job	=55910/1700
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	13.94	6	83.64
Travel to jobs	0.13	57	7.41
Job support	32.89	1	32.89
			123.94
Cost of this job $123.94
4
	Customer Margin—Activity-Based Costing
Sales		133.80
Costs:
Cleaning carpets	83.64
Travel to jobs	7.41
Job support	32.89	123.94
Customer margin		9.86