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 $22.90 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) 14,000 hundred square feet Travel to jobs Miles driven 92,500 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 $361,000 which includes the following costs: Wages $ 145,000 Cleaning supplies 27,000 Cleaning equipment depreciation 16,000 Vehicle expenses 34,000 Office expenses 60,000 President’s compensation 79,000 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 79 % 11 % 0 % 10 % 100 % Cleaning supplies 100 % 0 % 0 % 0 % 100 % Cleaning equipment depreciation 69 % 0 % 0 % 31 % 100 % Vehicle expenses 0 % 80 % 0 % 20 % 100 % Office expenses 0 % 0 % 64 % 36 % 100 % President’s compensation 0 % 0 % 28 % 72 % 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 50-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 $45.80 (200 square feet @ $22.90 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	114550	15950	0	14500	145000
Cleaning supplies	27000	0	0	0	27000
Cleaning equipment depreciation	11040	0	0	4960	16000
Vehicle expenses	0	27200	0	6800	34000
Office expense	0	0	38400	21600	60000
President’s compensation	0	0	22120	56880	79000
Total cost	152590	43150	60520	104740	361000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	10.90	per hundred square feet	=152590/14000
Travel to jobs	0.47	per mile	=43150/92500
Job support	35.60	per job	=60520/1700
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	10.90	2	21.80
Travel to jobs	0.47	50	23.50
Job support	35.60	1	35.60
			80.90
Cost of the job 80.90
4
	Customer Margin—Activity-Based Costing
Sales		45.80
Costs:
Cleaning carpets	21.80
Travel to jobs	23.50
Job support	35.60	80.90
Customer margin		-35.10