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 $23.15 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)	8,500	hundred square feet
Travel to jobs	Miles driven	410,500	miles
Job support	Number of jobs	2,000	jobs
Other (organization-sustaining costs and idle capacity costs)	None	Not applicable

The total cost of operating the company for the year is $346,000 which includes the following costs:

Wages	$	143,000
Cleaning supplies		24,000
Cleaning equipment depreciation		12,000
Vehicle expenses		38,000
Office expenses		57,000
President’s compensation		72,000
Total cost	$	346,000

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	77	%	14	%	0	%	9	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	66	%	0	%	0	%	34	%	100	%
Vehicle expenses	0	%	80	%	0	%	20	%	100	%
Office expenses	0	%	0	%	64	%	36	%	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.

3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch—a 51-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 $138.90 (600 square feet @ $23.15 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	110110	20020	0	12870	143000
Cleaning supplies	24000	0	0	0	24000
Cleaning equipment depreciation	7920	0	0	4080	12000
Vehicle expenses	0	30400	0	7600	38000
Office expense	0	0	36480	20520	57000
President’s compensation	0	0	21600	50400	72000
Total cost	142030	50420	58080	95470	346000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	16.71	per hundred square feet	=142030/8500
Travel to jobs	0.12	per mile	=50420/410500
Job support	29.04	per job	=58080/2000
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	16.71	6	100.26
Travel to jobs	0.12	51	6.12
Job support	29.04	1	29.04
			135.42
Cost of the job 135.42
4
	Customer Margin—Activity-Based Costing
Sales		138.90
Costs:
Cleaning carpets	100.26
Travel to jobs	6.12
Job support	29.04	135.42
Customer margin		3.48