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)	10,000	hundred square feet
Travel to jobs	Miles driven	228,000	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 $355,000 which includes the following costs:

Wages	$	138,000
Cleaning supplies		27,000
Cleaning equipment depreciation		12,000
Vehicle expenses		36,000
Office expenses		64,000
President’s compensation		78,000
Total cost	$	355,000

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	74	%	15	%	0	%	11	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	67	%	0	%	0	%	33	%	100	%
Vehicle expenses	0	%	75	%	0	%	25	%	100	%
Office expenses	0	%	0	%	56	%	44	%	100	%
President’s compensation	0	%	0	%	32	%	68	%	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 52-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)	Allocation of costs to activity cost pools
					Cleaning carpets			Travel to jobs			Job support			Other			Total
					Cost	%		Cost	%		Cost	%		Cost	%		Cost	%
	Wages				$ 102,120.00	74%		$ 20,700.00	15%		$               -	0%		$   15,180.00	11%		$ 138,000.00	100%
	Cleaning supplies				$   27,000.00	100%		$               -	0%		$               -	0%		$                 -	0%		$   27,000.00	100%
	Cleaning equipment depreciation				$     8,040.00	67%		$               -	0%		$               -	0%		$     3,960.00	33%		$   12,000.00	100%
	Vehicle expenses				$                 -	0%		$ 27,000.00	75%		$               -	0%		$     9,000.00	25%		$   36,000.00	100%
	Office expenses				$                 -	0%		$               -	0%		$ 35,840.00	56%		$   28,160.00	44%		$   64,000.00	100%
	President's compensation				$                 -	0%		$               -	0%		$ 24,960.00	32%		$   53,040.00	68%		$   78,000.00	100%
	Total				$ 137,160.00			$ 47,700.00			$ 60,800.00			$ 109,340.00			$ 355,000.00

2)	Activities	Costs	Volume	units	Rates
	Cleaning carpets	$      137,160.00	10000	per 100 sq. feet	$   13.72
	Travel to jobs	$        47,700.00	228000	miles	$      0.21
	Job support	$        60,800.00	1700	jobs	$   35.76
		$      245,660.00

3)	Job Cost
	Activities		Rates	Volume	Costs
	Cleaning carpets		$   13.72	600	$   82.30	(600 x $ 13.72 / 100)
	Travel to jobs		$      0.21	52	$   10.88
	Job support		$   35.76	1	$   35.76
	Total costs				$ 128.94

4)	Customer margin
	Total revenue		$ 138.90
	Total cost		$ 128.94
	Margin		$      9.96

Let me know if it's incorrect