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 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 (ees) Miles driven Number of Jobs Activity for the Year 8.500 hundred square feet 209,000 miles 2,100 jobs None Not applicable The total cost of operating the company for the year is $346,000 which includes the following costs: 140.000 Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses office expenses President's compensation Total cost 13.000 0. 63.000 78.000 346,000

Answer 1

1)

	Cleaning carpets	Travel to jobs	Job support	Other	Total
Wages	(140000*73%)= $102200	(140000*14%)= $19600	-	(140000*13%)= 18200	$140000
Cleaning supplies	22000	-	-	-	22000
Cleaning equipment depreciation	(13000*69%)= 8970	-	-	(13000*31%)= 4030	13000
Vehicle expenses	-	(30000*76%)= 22800	-	(30000*24%)= 7200	30000
Office expenses	-	-	(63000*60%)= 37800	(63000*40%)= 25200	63000
President's compensation	-	-	(78000*25%)= 19500	(78000*75%)= 58500	78000
Total	$133170	$42400	$57300	$113130	$346000

2)

Activity cost pool	Activity rate
Cleaning carpets	($133170/8500)= $15.67 per hundred square feet
Travel to jobs	($42400/209000)= $0.20 per mile
Job support	($57300/2100)= $27.29 per job

3) Calculation of cost of Job

Cleaning carpets (6*$15.67 per hundred square feet)	$94.02
Travel to jobs (51 mile*$0.20 per mile)	10.2
Job support (1 job*$27.29 per job)	27.29
Total	$131.51

4)

Sales		$143.40
Less: Costs:
Cleaning carpets (6*$15.67 per hundred square feet)	$94.02
Travel to jobs (51 mile*$0.20 per mile)	10.2
Job support (1 job*$27.29 per job)	27.29
Total costs		(131.51)
Customer margin		$11.89