Question

In: Accounting

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...

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 $22.70 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) 8,000 hundred square feet
Travel to jobs Miles driven 371,000 miles
Job support Number of jobs 1,800 jobs
Other (organization-sustaining costs and idle capacity costs) None Not applicable

The total cost of operating the company for the year is $358,000 which includes the following costs:

Wages $ 137,000
Cleaning supplies 33,000
Cleaning equipment depreciation 16,000
Vehicle expenses 35,000
Office expenses 59,000
President’s compensation 78,000
Total cost $ 358,000

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 % 15 % 0 % 13 % 100 %
Cleaning supplies 100 % 0 % 0 % 0 % 100 %
Cleaning equipment depreciation 67 % 0 % 0 % 33 % 100 %
Vehicle expenses 0 % 85 % 0 % 15 % 100 %
Office expenses 0 % 0 % 57 % 43 % 100 %
President’s compensation 0 % 0 % 28 % 72 % 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 53-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 $136.20 (600 square feet @ $22.70 per hundred square feet). Calculate the customer margin earned on this job.

Solutions

Expert Solution

Answer 1
The first-stage allocation of costs to the activity cost pools.
Cleaning Carpet Travel to Jobs Job Support Other
Wages $98,640 $20,550 $0 $17,810
Cleaning supplies $33,000 $0 $0 $0
Cleaning equipment depreciation $10,720 $0 $0 $5,280
Vehcile expenses $0 $29,750 $0 $5,250
Office expenses $0 $0 $33,630 $25,370
President's compensation $0 $0 $21,840 $56,160
Total Cost $142,360 $50,300 $55,470 $109,870
Answer 2
Calculation of Activity rates
Activity cost pool Total cost Activity for the year Activity rate
Cleaning carpets $142,360 8000 hundred square feet $17.80 per hundred square feet
Travel to jobs $50,300 371000 miles $0.14 per mile
Job support $55,470 1800 jobs $30.82 per job
Answer 3
Computation of the cost of this job using the activity-based costing system.
Cleaning carpets [6 * $17.80] $106.77
Travel to jobs [53 * $0.14] $7.19
Job support [1 * $30.82] $30.82
Cost of the Job $144.77
Answer 4
Calculation the customer margin earned on this job.
Revenue from Flying N Ranch $136.20
Less : Cost of the job $144.77
Customer Margin -$8.57

Related Solutions

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $22.55 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...
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $23.55 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...
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $22.85 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...
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $23.95 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...
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $22.65 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...
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $23.45 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...
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $22.30 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...
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $22.75 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...
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $23.50 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...
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $22.65 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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT