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 $22.75 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, a simple system consisting of four activity cost pools seemed to be adequate. 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) 12,500 hundred square feet Travel to jobs Miles driven 446,000 miles Job support Number of jobs 2,100 jobs Other (costs of idle capacity and organization-sustaining costs) None Not applicable The total cost of operating the company for the year is $344,000, which includes the following costs: Wages $ 139,000 Cleaning supplies 26,000 Cleaning equipment depreciation 6,000 Vehicle expenses 30,000 Office expenses 67,000 President’s compensation 76,000 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 74 % 11 % 0 % 15 % 100 % Cleaning supplies 100 % 0 % 0 % 0 % 100 % Cleaning equipment depreciation 71 % 0 % 0 % 29 % 100 % Vehicle expenses 0 % 80 % 0 % 20 % 100 % Office expenses 0 % 0 % 55 % 45 % 100 % President’s compensation 0 % 0 % 35 % 65 % 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. (Round your answers to 2 decimal places.) 3. The company recently completed a 6 hundred square foot carpet-cleaning job at the Flying N ranch—a 58.00-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 and final answers to 2 decimal places.) 4. The revenue from the Flying N ranch was $136.50 (6 hundred square feet at $22.75 per hundred square feet). Prepare a report showing the margin from this job. (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	102860	15290	0	20850	139000
Cleaning supplies	26000	0	0	0	26000
Cleaning equipment depreciation	4260	0	0	1740	6000
Vehicle expenses	0	24000	0	6000	30000
Office expense	0	0	36850	30150	67000
President’s compensation	0	0	26600	49400	76000
Total cost	133120	39290	63450	108140	344000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	10.65	per hundred square feet	=133120/12500
Travel to jobs	0.09	per mile	=39290/446000
Job support	30.21	per job	=63450/2100
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	10.65	6	63.90
Travel to jobs	0.09	58	5.22
Job support	30.21	1	30.21
			99.33
Cost of this job $99.33
4
	Customer Margin—Activity-Based Costing
Sales		136.50
Costs:
Cleaning carpets	63.90
Travel to jobs	5.22
Job support	30.21	99.33
Customer margin		37.17