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 $28 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)		20,000		hundred square feet
Travel to jobs	Miles driven		60,000		miles
Job support	Number of jobs		2,000		jobs
Other (costs of idle capacity and organization-sustaining costs)	None		Not applicable

The total cost of operating the company for the year is $430,000, which includes the following costs:

Wages	$	150,000
Cleaning supplies		40,000
Cleaning equipment depreciation		20,000
Vehicle expenses		80,000
Office expenses		60,000
President’s compensation		80,000
Total cost	$	430,000

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		70	%			20	%			0	%			10	%				100	%
Cleaning supplies		100	%			0	%			0	%			0	%				100	%
Cleaning equipment depreciation		80	%			0	%			0	%			20	%				100	%
Vehicle expenses		0	%			60	%			0	%			40	%				100	%
Office expenses		0	%			0	%			45	%			55	%				100	%
President’s compensation		0	%			0	%			40	%			60	%				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 5 hundred square foot carpet-cleaning job at the Flying N ranch—a 75-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 $140 (5 hundred square feet at $28 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) First Stage Allocation of Cost to Activity Cost Pools (Amounts in $)

Particulars	Cleaning Carpets	Travel to Jobs	Job Support	Other
Wages (70:20:0:10)	105,000	30,000	0	15,000
Cleaning Supplies (100:0:0:0)	40,000	0	0	0
Cleaning equipment depreciation (80:0:0:20)	16,000	0	0	4,000
Vehicle expenses (0:60:0:40)	0	48,000	0	32,000
Office expenses (0:0:45:55)	0	0	27,000	33,000
President’s compensation (0:0:40:60)	0	0	32,000	48,000
Total	161,000	78,000	59,000	132,000

2) Calculation of Activity Rates (Amounts in $)

Activity Cost Pool	Cleaning Carpets	Travel to Jobs	Job Support
Total Activity Cost (A)	161,000	78,000	59,000
Total Activity (B)	20,000 hundred sq. ft	60,000 miles	2,000 jobs
Activity Rate (A/B)	8.05 per hundred sq.ft	1.30 per mile	29.50 per job

3) Cost of Job = Cleaning supplies+Travel to Jobs+Job Support

= ($8.05*5 hundred sq.ft)+($1.30*75 miles)+$29.50

= $40.25+$97.50+$29.50 = $167.25

4) Product Margin = Sales revenue - Total cost of job (as calculated in req. 3)

= $140 - $167.25 = -$27.25 (product margin is negative)