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 $22.60 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)	9,500	hundred square feet
Travel to jobs	Miles driven	439,000	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 $332,000 which includes the following costs:

Wages	$	137,000
Cleaning supplies		21,000
Cleaning equipment depreciation		11,000
Vehicle expenses		31,000
Office expenses		56,000
President’s compensation		76,000
Total cost	$	332,000

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	73	%	10	%	0	%	17	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	71	%	0	%	0	%	29	%	100	%
Vehicle expenses	0	%	84	%	0	%	16	%	100	%
Office expenses	0	%	0	%	58	%	42	%	100	%
President’s compensation	0	%	0	%	29	%	71	%	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 56-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 $90.40 (400 square feet @ $22.60 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

• All working forms part of the answer
• Requirement 1: First Stage Allocation

		Cleaning Carpets		Travel to Jobs		Job Support		Other		Total
	Total Cost	%	Allocated	%	Allocated	%	Allocated	%	Allocated	%	Allocated
Wages	137000	73	100010	10	13700	0	0	17	23290	100	137000
Cleaning supplies	21000	100	21000	0	0	0	0	0	0	100	21000
Cleaning equipment depreciation	11000	71	7810	0	0	0	0	29	3190	100	11000
Vehicle expenses	31000	0	0	84	26040	0	0	16	4960	100	31000
Office expenses	56000	0	0	0	0	58	32480	42	23520	100	56000
President’s compensation	76000	0	0	0	0	29	22040	71	53960	100	76000
Total	$332000	Total	$128820	Total	$39740	Total	$54520	Total	$108920	Total	$332000

• Requirement 2: Activity rates

	Overhead cost	Activity for year		Activity Rate per activity
Cleaning Carpets	128820	9500	hundred sqr feet	$13.56
Travel to Jobs	39740	439000	miles	$0.090523918
Job Support	54520	1700	jobs	$32.07058824
Other	108920	N/A
Total Overhead cost	$332000

• Requirement 3: Cost of Job

	Activity Rate per activity ($)	No. of activity	Cost allocated ($)
Cleaning Carpets	13.56	400 sqr feet	54.24
Travel to Jobs	0.090523918	56 miles	5.07
Job Support	32.07058824	1 job	32.07
		Total Cost	$91.38

• Requirement 4: Margin Earned

Revenues = $90.40
Cost assigned = $91.38

Margin earned = 90.4 – 91.38 = ($0.98)- Negative margin