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 $23.35 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, a simple system consisting of four activity cost pools seemed to be adequate. 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)		7,500		hundred square feet
Travel to jobs	Miles driven		81,500		miles
Job support	Number of jobs		1,700		jobs
Other (costs of idle capacity and organization-sustaining costs)	None		Not applicable

The total cost of operating the company for the year is $348,000, which includes the following costs:

Wages	$	135,000
Cleaning supplies		32,000
Cleaning equipment depreciation		11,000
Vehicle expenses		30,000
Office expenses		58,000
President’s compensation		82,000
Total cost	$	348,000

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		72	%			14	%			0	%			14	%				100	%
Cleaning supplies		100	%			0	%			0	%			0	%				100	%
Cleaning equipment depreciation		73	%			0	%			0	%			27	%				100	%
Vehicle expenses		0	%			78	%			0	%			22	%				100	%
Office expenses		0	%			0	%			63	%			37	%				100	%
President’s compensation		0	%			0	%			30	%			70	%				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 4 hundred square foot carpet-cleaning job at the Flying N ranch—a 58.00-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 and final answers to 2 decimal places.)

4. The revenue from the Flying N ranch was $93.40 (4 hundred square feet at $23.35 per hundred square feet). Prepare a report showing the margin from this job. (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	97200	18900	0	18900	135000
Cleaning supplies	32000	0	0	0	32000
Cleaning equipment depreciation	8030	0	0	2970	11000
Vehicle expenses	0	23400	0	6600	30000
Office expense	0	0	36540	21460	58000
President’s compensation	0	0	24600	57400	82000
Total cost	137230	42300	61140	107330	348000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	18.30	per hundred square feet	=137230/7500
Travel to jobs	0.52	per mile	=42300/81500
Job support	35.96	per job	=61140/1700
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	18.30	4	73.20
Travel to jobs	0.52	58	30.16
Job support	35.96	1	35.96
			139.32
Cost of this job $139.32
4
	Customer Margin—Activity-Based Costing
Sales		93.40
Costs:
Cleaning carpets	73.20
Travel to jobs	30.16
Job support	35.96	139.32
Customer margin		-45.92