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 $23.05 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)   10,500   hundred square feet
Travel to jobs   Miles driven   146,500   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 $367,000 which includes the following costs:

         
Wages   $   149,000
Cleaning supplies      29,000
Cleaning equipment depreciation      9,000
Vehicle expenses      34,000
Office expenses      62,000
President’s compensation      84,000
Total cost   $   367,000

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   72   %   14   %   0   %   14   %   100   %
Cleaning supplies   100   %   0   %   0   %   0   %   100   %
Cleaning equipment depreciation   73   %   0   %   0   %   27   %   100   %
Vehicle expenses   0   %   78   %   0   %   22   %   100   %
Office expenses   0   %   0   %   63   %   37   %   100   %
President’s compensation   0   %   0   %   31   %   69   %   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 51-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 $92.20 (400 square feet @ $23.05 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1

1. Allocation of cost to activity cost pools - first stage under ABC:-
Activity Cost pool	Wages resource consumption ratio	Wages cost allocated	Cleaning supplies resource consumption ratio	Cleaning supplies cost allocated	Cleaning equipment depreciation resource consumption ratio	Cleaning equipment depreciation cost allocated	Vehicle expenses resource consumption ratio	Vehicle expenses cost allocated	Office expenses resource consumption ratio	Office expenses cost allocated	President’s compensation resource consumption ratio	President’s compensationcost allocated	Total cost allocated
a	b	c = $149000*b	d	e = $29000*d	f	g = $9000*f	h	i = $34000*h	j	k = $62000*j	l	m = $84000*k	n = c+e+g+i+k+m
Cleaning carpets	72%	$ 107,280	100%	$ 29,000	73%	$                     6,570	0%	$ -	0%	$ -	0%	$                   -	$ 142,850
Travel to jobs	14%	$ 20,860	0%	$ -	0%	$ -	78%	$ 26,520	0%	$ -	0%	$                   -	$    47,380
Job support	0%	$ -	0%	$ -	0%	$ -	0%	$ -	63%	$         39,060	31%	$          26,040	$    65,100
Other (organization-sustaining costs and idle capacity costs)	14%	$ 20,860	0%	$ -	27%	$ 2,430	22%	$ 7,480	37%	$         22,940	69%	$          57,960	$ 111,670
Total	100%	$ 149,000	100%	$ 29,000	100%	$ 9,000	100%	$ 34,000	100%	$         62,000	100%	$ 84,000	$ 367,000

2. Computation of activity overhead rates under ABC:-
Activity Cost pool	Estimated Overhead Cost	Activity Drivers		Activity rate
a	b	c		d =b/c
Cleaning carpets	$142,850	10,500	hundred square feet	$13.60	per hundred square feet
Travel to jobs	$47,380	146,500	Miles	$0.32	per mile
Job support	$65,100	1,800	jobs	$36.16	per job
Other (organization-sustaining costs and idle capacity costs)	$111,670
Total	$367,000
3. Computation of cost of Job under ABC:-
Activity Cost pool	Activity Drivers		Activity rate
a	c		d =b/c		Estimated Overhead Cost
Cleaning carpets	4	hundred square feet	$13.60	per hundred square feet	$54.40
Travel to jobs	51	Miles	$0.32	per mile	$16.32
Job support	1	job	$36.16	per job	$36.16
Cost of Job					$106.88
4. Computation of customer margin earned on this job:-
					Amount
	Revenue			400 square feet @ $23.05 per hundred square feet	$                                  92.20
	Less:    Cost of Job				$ 106.88
	Customer margin				$                                (14.68)

Feel free to ask any clarification, if required. Kindly provide feedback by thumbs up, if satisfied. It will be highly appreciated.
Thank you.