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 $22.45 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 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) 13,000 hundred square feet Travel to jobs Miles driven 143,500 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 $346,000 which includes the following costs: Wages $ 143,000 Cleaning supplies 22,000 Cleaning equipment depreciation 14,000 Vehicle expenses 31,000 Office expenses 60,000 President’s compensation 76,000 Total cost $ 346,000 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 66 % 0 % 0 % 34 % 100 % Vehicle expenses 0 % 75 % 0 % 25 % 100 % Office expenses 0 % 0 % 65 % 35 % 100 % President’s compensation 0 % 0 % 26 % 74 % 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 58-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 $89.80 (400 square feet @ $22.45 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

Requirement 1
			GALLATIN CARPET CLEANING
				Distribution of Resource Consumption
				Across Activity Cost Pools
				Cleaning Carpets	Travel to Jobs	Job Support	Other	Totals
			Wages	75%	14%	0%	11%	100%
			Cleaning supplies	100%	0%	0%	0%	100%
			Cleaning equipment depreciation	66%	0%	0%	34%	100%
			Vehicle Expenses	0%	75%	0%	25%	100%
			Office Expenses	0%	0%	65%	35%	100%
			President's Compensation	0%	0%	26%	74%	100%
				Cleaning Carpets	Travel to Jobs	Job Support	Other	Totals
			Wages	$107,250	$20,020	$0	$15,730	$143,000
			Cleaning supplies	$22,000	$0	$0	$0	$22,000
			Cleaning equipment depreciation	$9,240	$0	$0	$7,480	$14,000
			Vehicle Expenses	$0	$16,500	$0	$5,500	$31,000
			Office Expenses	$0	$0	$14,300	$7,700	$60,000
			President's Compensation	$0	$0	$5,720	$16,280	$76,000
				$138,490	$36,520	$20,020	$52,690	$346,000
Requirement 2			GALLATIN CARPET CLEANING
			Activity Cost Pool		Total Cost	Total Activity	Activity Rate
			Cleaning Carpets		$138,490	13000	$10.65	per hundred square feet
			Travel to Jobs		$36,520	143500	$0.25	per mile
			Job Support		$20,020	1700	$11.78	per job
Requirement 3			GALLATIN CARPET CLEANING
				Job Cost - Flying - N- Ranch
			Activity Cost Pool		Activity Rate	Activity	Total Cost
			Cleaning Carpets		$10.65	4	$42.61	per hundred square feet
			Travel to Jobs		$0.25	58	$14.76	per mile
			Job Support		$11.78	1	$11.78	per job
							$69.15
				Product Profit Margin
			Sales		$89.80
			Cleaning Carpets	$42.61
			Travel to Jobs	$14.76
			Job Support	$11.78	$69.15
			Profit		$20.65