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 $22.10 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)	7,000	hundred square feet
Travel to jobs	Miles driven	180,500	miles
Job support	Number of jobs	2,000	jobs
Other (organization-sustaining costs and idle capacity costs)	None	Not applicable

The total cost of operating the company for the year is $352,000 which includes the following costs:

Wages	$	140,000
Cleaning supplies		34,000
Cleaning equipment depreciation		16,000
Vehicle expenses		35,000
Office expenses		56,000
President’s compensation		71,000
Total cost	$	352,000

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	75	%	14	%	0	%	11	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	73	%	0	%	0	%	27	%	100	%
Vehicle expenses	0	%	78	%	0	%	22	%	100	%
Office expenses	0	%	0	%	55	%	45	%	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.

	Cleaning Carpets Travel to Jobs Job Support Other Total Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President’s compensation Total cost

2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.)

	Activity Cost Pool Activity Rate Cleaning carpets per hundred square feet Travel to jobs per mile Job support per job

3. The company recently completed a 400 square foot carpet-cleaning job at the Flying N Ranch—a 50-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 calculations and final answer to 2 decimal places.)

	Cost of the job

4. The revenue from the Flying N Ranch was $88.40 (4 hundred square feet @ $22.10 per hundred square feet). Calculate the customer margin earned on this job. (Round your intermediate calculations and final answers to 2 decimal places.)

	Customer margin

Answer 1

Req1
STATEMENT SHOWING FIRST STAGE ALLOCATION OF COST TO ACTIVITY POOL
			BASIS OF	TOTAL	CLEANING	TRAVEL	JOB SUPPORT	OTHERS
			APPORTION	IN $	IN $	IN $	IN $	IN $
Wages			75:14:0:11	140,000	105,000	19,600	0	15,400
Cleaning supplies			100:0:0:0	34,000	34,000	0	0	0
Cleaning Equip dep			73:0:0:27	16,000	11,680	0	0	4,320
Vehicle expense			0:78:0:22	35,000	0	27,300	0	7,700
Ooffice expense			0:0:55:45	56,000	0	0	30,800	25,200
President compensation			0:0:32:68	71,000	0	0	22,720	48280
TOTAL COST OF ACTIVITY				352,000	150,680	46,900	53,520	100,900
Req 2
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Cleaning			Sq. feet	150,680	700,000	0.22	per sq. ft
Travel			Miles	46,900	180,500	0.26	per mile
Job Support			Jobs	53,520	2,000	26.76	per job
Req 3:
Cost of Job Flying-N
Cleaning activity cost (400 sq. ft @$0.22)				88
Travel (100 miles@$0.26)				26
Job support (1 job @$26.76)				26.76
TOTAL COST OF JOB				140.76
Req4:
Customer margin
Sales revenue (				88.4
Less: Activity cost				140.76
Customer margin/(Loss)				-52.36