Question

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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 $23.00 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 cleaning carpets Travel to jobs Job support Other (organization-sustaining costs and idle capacity costs) Activity Measure Square feet cleaned (005) Miles driven Number of jobs Activity for the Year 8,500 hundred square feet 69,000 miles 2,000 jobs None Not applicable The total cost of operating the company for the year is $344,000 which includes the following costs: Wages cleaning supplies cleaning equipment depreciation Vehicle expenses Office expenses President's compensation Total cost $ 141,000 33,000 11,000 29,000 59,000 71,000 $ 344,000

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	111390	18330	0	11280	141000
Cleaning supplies	33000	0	0	0	33000
Cleaning equipment depreciation	7260	0	0	3740	11000
Vehicle expenses	0	24650	0	4350	29000
Office expense	0	0	34220	24780	59000
President’s compensation	0	0	24140	46860	71000
Total cost	151650	42980	58360	91010	344000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	17.84	per hundred square feet	=151650/8500
Travel to jobs	0.62	per mile	=42980/69000
Job support	29.18	per job	=58360/2000
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	17.84	6	107.04
Travel to jobs	0.62	60	37.20
Job support	29.18	1	29.18
			173.42
Cost of the job 173.42
4
	Customer Margin—Activity-Based Costing
Sales		138.00
Costs:
Cleaning carpets	107.04
Travel to jobs	37.20
Job support	29.18	173.42
Customer margin		-35.42