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 $22.90 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 283,500 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 $344,000 which includes the following costs: Wages $ 145,000 Cleaning supplies 23,000 Cleaning equipment depreciation 8,000 Vehicle expenses 27,000 Office expenses 60,000 President’s compensation 81,000 Total cost $ 344,000 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 % 14 % 0 % 13 % 100 % Cleaning supplies 100 % 0 % 0 % 0 % 100 % Cleaning equipment depreciation 71 % 0 % 0 % 29 % 100 % Vehicle expenses 0 % 78 % 0 % 22 % 100 % Office expenses 0 % 0 % 59 % 41 % 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 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 $183.20 (800 square feet @ $22.90 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	105850	20300	0	18850	145,000
Cleaning Supplies	23000	0	0	0	23,000
Cleaning Equipment Depreciation	5680	0	0	2320	8,000
Vehicle Expenses	0	21060	0	5940	27,000
Office Expenses	0	0	35400	24600	60,000
President's Compensation	0	0	23490	57510	81,000
Total Cost	$134,530	$41,360	$58,890	$109,220	$344,000

Working notes for the above answer is as under

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2

Activity Cost Pool	Total Cost (A)	Activity Measure	Activity for the Year (B)	Activity Rate (A/B)
Cleaning Carpets	134,530	Square Feet Cleaned	7,000	$19.22	per hundred square feet
Travel to Jobs	41,360	Miles Driven	283,500	$0.15	per mile
Job Support	$58,890	Number of Jobs	1,700	$34.64	per job

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3

Flying N Ranch
Activity Cost Pool	Activity Rate (A)	Activity (B)	Total Cost (A*B)
Cleaning Carpets	$19.22	8	153.75
Travel to Jobs	$0.15	55	8.02
Job Support	$34.64	1	34.64
Total Cost			$196.41

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4

Gallatin Carpet Cleaning
Customer Margin – Activity Based Costing
Amounts Per Job
Sales		183.2
Costs:
Cleaning Carpets	153.75
Travel to Jobs	8.02
Job Support	34.64	196.41
Margin		($13.21)