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 $24.05 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)	10,000 hundred square feet
Travel to jobs	Miles driven	253,000 miles
Job Support	Number of jobs	2,100 jobs
Other (organization-sustaining costs and idle capacity costs)	None	Not applicable

The Total cost of operating the company for the year is $360,000 which includes the following costs:

Waves	$138,000
Cleaning supplies	33,000
Cleaning equipment depreciation	19,000
Vehicle expenses	27,000
Office expenses	64,000
President's compensation	79,000
TOTAL COST:	$360,000

Resource Consumption is distributed across the activities as follows:

	Cleaning Carpets	Travel to jobs	Job Support	Other	Total
Wages	77%	12%	0%	11%	100%
Cleaning Supplies	100%	0%	0%	0%	100%
Cleaning Equipment Depreciation	70%	0%	0%	30%	100%
Vehicle Expenses	0%	80%	0%	20%	100%
Office Expenses	0%	0%	57%	43%	100%
President's Compensation	0%	0%	29%	71%	100%

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 600 square foot carpet-cleaning job at the Flying N Ranch-a 60-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 $144.30 (600 square feet @ $24.05 per hundred square feet). Calculate the customer margin earned on this job. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Prepare the first-stage allocation of costs to the activity cost pools. Cleaning Carpets Travel to Jobs Job Support Other Total I Wages Cleaning supplies Cleaning equipment depreciation sent depreciation Vehicle expenses Office expenses President's compensation Total cost Required 1 Required 2 > Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.) Activity Rate Activity Cost Pool Cleaning carpets Travel to jobs Job support per hundred square feet per mile per job < Required 1 Required 3 > Required 1 Required 2 Required 3 Required 4 The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch-a 60-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 calculations and final answer to 2 decimal places.) Cost of the job < Required 2 Required 4 > Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 The revenue from the Flying N Ranch was $144.30 (6 hundred square feet @ $24.05 per hundred square feet). Calculate the customer margin earned on this job. (Negative customer margins should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places. Customer margin < Required 3 Required 4 )

Answer 1

1 Solution : e 1. First Stage allocation of costs to the activity cost pools Cleaning Carpets Travel to Jobs Job Support other Wages $ 106260 (77%) $ 16560 (12%) $ 15180 (11%) 5 Cleaning Supplies $ 33000 (100%) 5 Cleaning Equipment Depreciati$ 13300 (70%) $ 5700 (30%) - Vehicle expenses $ 21600 (80%) $ 5400 (20%) 8 Office Expenses $36480 (57%) $27520 (43%) Presidents' Compensation $ 22910 (29%) $ 56090 (71%) 0 Total Cost $152,560 $38,160 $59,390 $109,890 Total $138,000 $33,000 $19,000 $27,000 $64,000 $79,000 $360,000

2. Calculation of Activity rates for each activity cost pool :- Activity Rate = Total Overhead ( Related to cost driver ) / Cost Driver Activity Cost pool Annual Costs (A) Driver (B) Activity Rate (A/B) Cleaning Carpets $152,560 10000 hundred square feet 152560 / 10000 = $ 15.26 per hundred sq. feet Travel to jobs $38,160 253000 Miles 38160/253000 = $ 0.15 per mile - Job Support $59,390 2100 Jobs 59390 / 2100 = $ 28.28 per job

4 5 3. Calculation of costs of Flying N Ranch using activity based costing 6 Activity Cost Pool Amount 7 Carpet Cleaning(A) $91.56 (600 Square feet * $ 15.26 per hundred square feet) 00 Lo Travel to Jobs (B) (60 miles * $ 0.15 per mile) -3 Job Support (C) $28.28 (1 Job * $ 28.28 per job) $128.84 -5 Total Costs (A+B+C) -8 4. Calculation of customer margin on Flying N Ranch -9 Total Revenue $144.30 o Less: Total Costs ($128.84) 1 Customer Margin $15.46