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 $22.70 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)	12,000	hundred square feet
Travel to jobs	Miles driven	383,000	miles
Job support	Number of jobs	1,700	jobs
Other (organization-sustaining costs and idle capacity costs)	None	Not applicable

The total cost of operating the company for the year is $345,000 which includes the following costs:

Wages	$	150,000
Cleaning supplies		22,000
Cleaning equipment depreciation		7,000
Vehicle expenses		35,000
Office expenses		59,000
President’s compensation		72,000
Total cost	$	345,000

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	%	15	%	0	%	10	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	66	%	0	%	0	%	34	%	100	%
Vehicle expenses	0	%	83	%	0	%	17	%	100	%
Office expenses	0	%	0	%	59	%	41	%	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 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 $45.40 (200 square feet @ $22.70 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

Requirement 1
			Cleaning	Travel to	job	other	total
			carpets	jobs	support
Wages			112500	22500		15000	150000
Cleaning supplies			22000				22000
Cleaning Equipment depreciation			4620			2380	7000
Vechicle expenses				29050		5950	35000
office expenses					34810	24190	59000
presidents compensation					22320	49680	72000
total cost			139120	51550	57130	97200	345000
Requirement 2
Activity cost pool			Activity rate
Cleaning carpets			11.59	per hundered square feet
Travel to jobs			0.13	per mile
job support			33.61	per job
Requirement 3
Cost of the job			64.2
(2*11.59 +57*.13+33.61)
Requirement 4
Customer margin-Activity Based
Sales					45.4
Costs:
Cleaning carpets				23.18
Travel to jobds				7.41
job support				33.61
					64.20
Customer margin					-18.80	answer