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 $22.30 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 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)	12,000	hundred square feet
Travel to jobs	Miles driven	256,000	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 $357,000 which includes the following costs:

Wages	$	146,000
Cleaning supplies		22,000
Cleaning equipment depreciation		19,000
Vehicle expenses		33,000
Office expenses		57,000
President’s compensation		80,000
Total cost	$	357,000

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	%	16	%	0	%	10	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	68	%	0	%	0	%	32	%	100	%
Vehicle expenses	0	%	81	%	0	%	19	%	100	%
Office expenses	0	%	0	%	64	%	36	%	100	%
President’s compensation	0	%	0	%	30	%	70	%	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 800 square foot carpet-cleaning job at the Flying N Ranch—a 55-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 $178.40 (800 square feet @ $22.30 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

1

Prepare the first-stage allocation of costs to the activity cost pools.

	Cleaning	Travel to	Job
	Carpets	Jobs	Support	Other	Totals
Wages	108,040	23,360	0	14,600	$146,000
Cleaning supplies	22,000	0	0	0	$22,000
Cleaning equipment depreciation	12,920	0	0	6,080	$19,000
Vehicle expenses	0	26,730	0	6,270	$33,000
Office expenses	0	0	36,480	20,520	$57,000
President's compensation	0	0	24,000	56,000	$80,000
Total cost	$142,960	$50,090	$60,480	$103,470	$357,000

Working notes for the above answer is as under

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2

Compute the activity rates for the activity cost pools.

GALLATIN CARPET CLEANING
Activity Rates for Activity Cost Pools
		Total	Activity
Activity Cost Pool	Total Cost	Activity	Rate
	A	B	C=A/B
Cleaning carpets	$142,960	12,000	$11.91
Travel to job	50,090	256,000	0.20
Job support	60,480	1,800	33.60

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3

The company recently completed a 800 square foot carpet-cleaning job at the Flying N Ranch—a 55-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system

GALLATIN CARPET CLEANING
Job Cost - Flying N Ranch
	Activity		Total
Activity Cost Pool	Rate	Activity	Cost
	A	B	C=A*B
Cleaning carpets	$11.91	8	$95.31
Travel to job	0.20	55	10.76
Job support	33.60	1	33.60
Total			$139.67

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4

GALLATIN CARPET CLEANING
Product Margin
Sales		$178.40
Costs:
Cleaning carpets	$95.31
Travel to jobs	$10.76
Job support	$33.60	139.67
Product margin		$38.73