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A local cleaning service has identified 4 activities that drive its costs. The service uses activity-based...

A local cleaning service has identified 4 activities that drive its costs. The service uses activity-based costing to estimate the costs of jobs prior to pricing them. They clean both commercial and residential properties. They have the following budgets for the upcoming year:

Cost Type

Budgeted Cost for Both Commercial & Residential Properties

Driver

Expected Driver Activity for Commercial Properties

Expected Driver Activity for Residential Properties

Cleaning Personnel

$120,000

# of Properties to Clean

600 properties to clean

900 properties to clean

Travel to Jobs

$30,000

Miles Driven to/from Property

30,000 miles (round-trip)

10,000 miles

(round-trip)

Cleaning Equipment

$40,000

Hours to Clean a Property

24,000 hours

16,000 hours

Cleaning Supplies

$60,000

Square Feet of Property

360,000 square feet

240,000 square feet

A residential customer has called and would like price quote to have his property cleaned next week. The property is a 20 mile round-trip to/from the cleaning personnel. It should take about 4 hours to clean it and the house is 1,000 square feet.

What would you recommend the price quote be to this customer? Support your answer with clear calculations of your cost estimate and about your pricing strategy.

Solutions

Expert Solution

Calculation of activity based cost driver rates:

Particulars Cost Driver Budgeted cost Budgeted units of cost driver Rate per cost driver unit
Cleaning personnel Number of property clean $         1,20,000 1500 80
Travels to Job Miles driven to/from property $             30,000 40000 0.75
Cleaning Equipment Hours to clean a property $             40,000 40000 1
Cleaning Supplies Square feet of property $             60,000 600000 0.1

Calculation of price quoted to customer:-

Particulars Cost driver units Cost driver rate Cost Allocated
Cleaning personnel 1 80 $                                                    80
Travels to Job 20 0.75 $                                                    15
Cleaning Equipment 4 1 $                                                      4
Cleaning Supplies 1000 0.1 $                                                  100
Price to be charged $                                                  199

The cleaning service company has used activity based costing method to calculate teh cost. Also, it has used total costing method for calculation of price to be quoted.

ekkarill92 answered 2 years ago
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