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 $23.20 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) 10,500 hundred square feet Travel to jobs Miles driven 119,000 miles Job support Number of jobs 1,900 jobs Other (organization-sustaining costs and idle capacity costs) None Not applicable The total cost of operating the company for the year is $359,000 which includes the following costs: Wages $ 143,000 Cleaning supplies 25,000 Cleaning equipment depreciation 11,000 Vehicle expenses 33,000 Office expenses 69,000 President’s compensation 78,000 Total cost $ 359,000 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 % 15 % 0 % 15 % 100 % Cleaning supplies 100 % 0 % 0 % 0 % 100 % Cleaning equipment depreciation 68 % 0 % 0 % 32 % 100 % Vehicle expenses 0 % 79 % 0 % 21 % 100 % Office expenses 0 % 0 % 57 % 43 % 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 400 square foot carpet-cleaning job at the Flying N Ranch—a 58-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 $92.80 (400 square feet @ $23.20 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	100100	21450	0	21450	143000
Cleaning supplies	25000	0	0	0	25000
Cleaning equipment depreciation	7480	0	0	3520	11000
Vehicle expenses	0	26070	0	6930	33000
Office expense	0	0	39330	29670	69000
President’s compensation	0	0	24960	53040	78000
Total cost	132580	47520	64290	114610	359000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	12.63	per hundred square feet	=132580/10500
Travel to jobs	0.40	per mile	=47520/119000
Job support	33.84	per job	=64290/1900
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	12.63	4	50.52
Travel to jobs	0.40	58	23.20
Job support	33.84	1	33.84
			107.56
Cost of the job $107.56
4
	Customer Margin—Activity-Based Costing
Sales		92.80
Costs:
Cleaning carpets	50.52
Travel to jobs	23.20
Job support	33.84	107.56
Customer margin		-14.76