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 $22.25 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 (005) Miles driven Number of jobs Activity for the Year 8,000 hundred square feet 417,500 miles 1,900 jobs None Not applicable The total cost of operating the company for the year is $349,000 which includes the following costs: Wages Cleaning supplies cleaning equipment depreciation Vehicle expenses Office expenses President's compensation Total cost $ 137,000 32,000 8,000 27,000 60,000 85,000 $ 349,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption Across Activities cleaning Travel Carpets to Jobs Wades 77% 13% Job Support 0% Other 10% Total 100%

Answer 1

Solution 1:

First stage allocation of cost to activity cost pools
Particulars	Cleaning Carpets		Travel to Jobs		Job Support		Others		Total Cost
	%	Amount	%	Amount	%	Amount	%	Amount
Wages	77%	$1,05,490	13%	$17,810	0%	$0	10%	$13,700	$1,37,000
Cleaning Supplies	100%	$32,000	0%	$0	0%	$0	0%	$0	$32,000
Cleaning Equipment depreciation	73%	$5,840	0%	$0	0%	$0	27%	$2,160	$8,000
Vehicle Expenses	0%	$0	83%	$22,410	0%	$0	17%	$4,590	$27,000
Office Expense	0%	$0	0%	$0	61%	$36,600	39%	$23,400	$60,000
President's Compensation	0%	$0	0%	$0	29%	$24,650	71%	$60,350	$85,000
Total		$1,43,330		$40,220		$61,250		$1,04,200	$3,49,000

SOlution 2:

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
					Cleaning Carpets	$1,43,330.00	Square feet cleaned	8000	$17.92
Travel to Jobs	$40,220.00	Miles driven	417500	$0.10
Job Support	$61,250.00	Nos of jobs	1900	$32.24
Other	$1,04,200.00	No allocation

Solution 3:

Computation of Job Cost
Particulars	Amount
Cleaning Carpet (6*$17.92)	$107.52
Travel to Jobs (54*$0.10)	$5.40
Job Support	$32.24
Total Cost	$145.16

Solution 4:

Customer Margin - Activity based costing
Particulars		Amount
Revenue		$133.50
Costs:
Cleaning Carpet	$107.52
Travel to Jobs	$5.40
Job Support	$32.24
Total Cost		$145.16
Customer Margin		-$11.66