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 $23.95 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)	11,000	hundred square feet
Travel to jobs	Miles driven	230,000	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 $358,000 which includes the following costs:

Wages	$	143,000
Cleaning supplies		21,000
Cleaning equipment depreciation		17,000
Vehicle expenses		30,000
Office expenses		68,000
President’s compensation		79,000
Total cost	$	358,000

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	75	%	14	%	0	%	11	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	69	%	0	%	0	%	31	%	100	%
Vehicle expenses	0	%	75	%	0	%	25	%	100	%
Office expenses	0	%	0	%	65	%	35	%	100	%
President’s compensation	0	%	0	%	27	%	73	%	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 54-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 $143.70 (600 square feet @ $23.95 per hundred square feet). Calculate the customer margin earned on this job.

Prepare the first-stage allocation of costs to the activity cost pools.

	Cleaning Carpets Travel to Jobs Job Support Other Total Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President’s compensation Total cost

Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.)

	Activity Cost Pool Activity Rate Cleaning carpets per hundred square feet Travel to jobs per mile Job support per job

The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch—a 54-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system. (Round your intermediate calculations and final answer to 2 decimal places.)

	Cost of the job

The revenue from the Flying N Ranch was $143.70 (6 hundred square feet @ $23.95 per hundred square feet). Calculate the customer margin earned on this job. (Negative customer margins should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.)

	Customer margin

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	107250	20020	0	15730	143000
Cleaning supplies	21000	0	0	0	21000
Cleaning equipment depreciation	11730	0	0	5270	17000
Vehicle expenses	0	22500	0	7500	30000
Office expense	0	0	44200	23800	68000
President’s compensation	0	0	21330	57670	79000
Total cost	139980	42520	65530	109970	358000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	12.73	per hundred square feet	=139980/11000
Travel to jobs	0.18	per mile	=42520/230000
Job support	31.20	per job	=65530/2100
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	12.73	6	76.38
Travel to jobs	0.18	54	9.72
Job support	31.20	1	31.20
			117.30
Cost of the job 117.30
4
	Customer Margin—Activity-Based Costing
Sales		143.70
Costs:
Cleaning carpets	76.38
Travel to jobs	9.72
Job support	31.20	117.30
Customer margin		26.40