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 $22.50 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)		14,500		hundred square feet
Travel to jobs	Miles driven		172,000		miles
Job support	Number of jobs		1,900		jobs
Other (costs of idle capacity and organization-sustaining costs)	None		Not applicable

The total cost of operating the company for the year is $353,000, which includes the following costs:

Wages	$	136,000
Cleaning supplies		32,000
Cleaning equipment depreciation		12,000
Vehicle expenses		28,000
Office expenses		63,000
President’s compensation		82,000
Total cost	$	353,000

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	%			11	%			0	%			17	%				100	%
Cleaning supplies		100	%			0	%			0	%			0	%				100	%
Cleaning equipment depreciation		73	%			0	%			0	%			27	%				100	%
Vehicle expenses		0	%			80	%			0	%			20	%				100	%
Office expenses		0	%			0	%			59	%			41	%				100	%
President’s compensation		0	%			0	%			31	%			69	%				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 6 hundred square foot carpet-cleaning job at the Flying N ranch—a 51.00-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 $135.00 (6 hundred square feet at $22.50 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

STATEMENT SHOWING FIRST STAGE ALLOCATION OF COST TO ACTIVITY POOL
			BASIS OF	Cleaning	Travel	Job Support	Other	Total
			APPORTION	IN $	IN $	IN $	IN $	IN $
Wages and salaries			72:11:0:17	97,920	14,960	0	23,120	136,000
Cleaning supplies			100:0:0:0	32,000	0	0	0	32,000
Cleaning equipment dep			73:0:0:27	8,760	0	0	3,240	12,000
Vehicle expenses			0:80:0:20	0	22,400	0	5,600	28,000
office expenses			0:0:59:41	0	0	37,170	25,830	63,000
President compensation			0:0:31:69	0	0	25,420	56,580	82000
TOTAL COST OF ACTIVITY				138,680	37,360	62,590	114,370	353,000
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Cleaning			00 Sq. ft	138680	14500	9.56
Travel			Miles	37,360	172,000	0.22
Job Support			Jobs	62,590	1,900	32.94
Cost of Job:
Cleaning (6*9.56):		57.36
Travel (51*2*0.22):		22.44
Job Support:		32.94
Total cost		112.74
Customer Margin:
Revenue		135
Less: Total cost		112.74
Customer Margin:		22.26