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 $22.75 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)	13,500	hundred square feet
Travel to jobs	Miles driven	142,000	miles
Job support	Number of jobs	1,600	jobs
Other (organization-sustaining costs and idle capacity costs)	None	Not applicable

The total cost of operating the company for the year is $361,000 which includes the following costs:

Wages	$	137,000
Cleaning supplies		26,000
Cleaning equipment depreciation		12,000
Vehicle expenses		40,000
Office expenses		68,000
President’s compensation		78,000
Total cost	$	361,000

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	76	%	14	%	0	%	10	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	68	%	0	%	0	%	32	%	100	%
Vehicle expenses	0	%	79	%	0	%	21	%	100	%
Office expenses	0	%	0	%	56	%	44	%	100	%
President’s compensation	0	%	0	%	26	%	74	%	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. (Round your answers to 2 decimal places.)

3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch—a 60-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.)

4. The revenue from the Flying N Ranch was $136.50 (600 square feet @ $22.75 per hundred square feet). Calculate the customer margin earned on this job. (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

Solution:

Part 1 --- First Stage Allocation of Costs to the activity cost pools

	Cleaning Carpets	Travel to Jobs	Job Support	Other	Total
Wages	$104,120 (137000*76%)	$19,180 (137000*14%)	$0	$13,700 (137000*10%)	$137,000
Cleaning supplies	$26,000	$0	$0	0	$26,000
Cleaning equipment depreciation	$8,160 (12000*68%)	$0	$0	$3,840 (12000*32%)	$12,000
Vehicle expenses	$0	$31,600 (40,000*79%)	$0	$8,400 (40000*21%)	$40,000
Office expenses	$0	$0	$38,080 (68000*56%)	$29,920 (68000*44%)	$68,000
President’s compensation	$0	$0	$20,280 (78000*26%)	$57,720 (78000*74%)	$78,000
Total	$138,280	$50,780	$58,360	$113,580	$361,000

Part 2 --- activity rates for the activity cost pools

Activity Cost Pool	Expected Manufacturing Overhead Costs (A)	Expected Activity Cost Driver (B)		Activity Rate (C = A/B)
Cleaning Carpets	$138,280	13,500	hundred square feet	$10.24	per hundred square feet
Travel to Jobs	$50,780	142000	miles	$0.36	per mile
Job Support	$58,360	1600	Jobs	$36.48	per job
Other	$113,580	NA	NA
	$361,000

Part 3 -- - the cost of this job using the activity-based costing system

	Activity Usage (A)		Activity Rate (B)	Cost Assigned (A*B)
Cleaning Carpet	6	hundred square feet	$10.24	$61.44
Travel to Job	60	Miles	$0.36	$21.60
Job Support	1	Job	$36.48	$36.48
Total Cost				$119.52

Part 4 -- customer margin earned on this job

Revenue from Job	$136.50
Cost Assigned to Job (as per part 3)	$119.52
Customer Margin Earned on this Job	$16.98

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