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 $23.50 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 (05) Miles driven Number of jobs Activity for the Year 14,000 hundred square feet 80,500 miles 2,000 jobs None Not applicable The total cost of operating the company for the year is $357,000 which includes the following costs: $ Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President's compensation Total cost 144,000 27,000 10,000 30,000 67,000 79,000 357,000 $ Resource consumption is distributed across the activities as follows: Job Support 0% Distribution of Resource Consumption Across Activities Cleaning Travel Carpets to Jobs Wages 77% Cleaning supplies 100% Cleaning equipment depreciation Vehicle expenses 0% 75% Office expenses 0% President's compensation 12% 0% 0% 74% 0% 0% 56% Other 11% 0% 26% 25% 44% 68% Total 100% 100% 100% 100% 100% 100% 0% 32% Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	110880	17280	0	15840	144000
Cleaning supplies	27000	0	0	0	27000
Cleaning equipment depreciation	7400	0	0	2600	10000
Vehicle expenses	0	22500	0	7500	30000
Office expense	0	0	37520	29480	67000
President’s compensation	0	0	25280	53720	79000
Total cost	145280	39780	62800	109140	357000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	10.38	per hundred square feet	=145280/14000
Travel to jobs	0.49	per mile	=39780/80500
Job support	31.40	per job	=62800/2000
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	10.38	8	83.04
Travel to jobs	0.49	51	24.99
Job support	31.40	1	31.40
			139.43
Cost of the job $139.43
4
	Customer Margin—Activity-Based Costing
Sales		188.00
Costs:
Cleaning carpets	83.04
Travel to jobs	24.99
Job support	31.40	139.43
Customer margin		48.57