Question

Chapter 7

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 $22.65 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 (ees) Miles driven Number of jobs Activity for the Year 6,000 hundred square feet 119,000 miles 1,600 jobs None Not applicable The total cost of operating the company for the year is $367,000 which includes the following costs: $ Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President's compensation Total cost 141,000 32,000 20,000 35,000 64,000 75,000 367,000 $ Resource consumption is distributed across the activities as follows: Job Support 0% Other 12% Distribution of Resource Consumption Across Activities Cleaning Travel Carpets to Jobs Wages 74% 14% Cleaning supplies 100% 0% Cleaning equipment depreciation 66% 0% Vehicle expenses 0% 81% Office expenses 0% President's compensation 0% 0% 0% Total 100% 100% 100% 100% 100% 100% 0% 34% 19% 43% 68% 57% % 0% 32% 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 800 square foot carpet-cleaning job at the Flying Nranch-a 54-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 $181.20 (800 square feet a $22.65 per hundred square feet). Calculate the customer margin earned on this job.

Required 1

Required 2

Required 3

Required 4

Answer 1

1) First stage allocation

	Cleaning carpets	travel to jobs	Job Support	Other	Total
Wages	104340	19740	0	16920	141000
Cleaning supplies	32000	0	0	0	32000
Cleaning equipment depreciation	13200	0	0	6800	20000
Vehicle expense	0	28350	0	6650	35000
Office expense	0	0	36480	27520	64000
President compensation	0	0	24000	51000	75000
Total	149540	48090	60480	108890	367000

2) Activity rate

Cleaning carpet (149540/6000)	24.92 per square feet
Travel to Jobs (48090/119000)	0.40 miles
Job support (60480/1600)	37.80 per job

3) Total job Cost = (8*24.92)+(54*.40)+37.80 = 258.76

4) Customer margin = 258.76-181.20 = -77.56