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 $28 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, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below: Activity Cost Pool Cleaning carpets Travel to jobs Job support Other (costs of idle capacity and organization-sustaining costs) Activity Measure Square feet cleaned (00s) Miles driven Number of jobs Activity for the Year 20,000 hundred square feet 60,000 miles 2,000 jobs None Not applicable The total cost of operating the company for the year is $430,000, which includes the following costs: Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President's compensation Total cost $ 150,000 40,000 20,000 80,000 60,000 80,000 $430,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption Across Activities Job Support 0% Total Cleaning Carpets 70% 100% 80% 0% Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President's compensation 0% Travel to Jobs 20% 0% 0% 60% 0% 0% 0% 0% 45% 40% Other 10% 0% 20% 40% 55% 60% 100% 100% 100% 100% 100% 100% 0% 0% Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Answer 1

Working note : First Stage allocation of costs to activity pools Cleaning Carpets $ 105,000.00 $ 40,000.00 $ 16,000.00 Job Support $ Wages Cleaning supplies Cleaning equipment and depreciation Vehicle expenses Office expenses Presidents Compensation Total Cost Travel to jobs $ 30,000.00 $ $ $ 48,000.00 Other $ 15,000.00 - $ 4,000.00 $ 32,000.00 $ 33,000.00 $ 48,000.00 $ 132,000.00 Ant- Total $ 150,000.00 $ 40,000.00 $ 20,000.00 $ 80,000.00 $ 60,000.00 $ 80,000.00 $430,000.00 to tota 27,000.00 32,000.00 59,000.00 $ 161,000.00 $ 78,000.00 $ Activity Rates of Cost Pools Activity Cost pools Cleaning Carpets Travel to Jobs job Support Total Costs(A) Total Activity(B) Activity Rate(A/B) $ 161,000.00 20000 $ 8.05 $ 78,000.00 60000 $ 1.30 $ 59,000.00 2000 $ 29.50 Activity Cost for Flying N Ranchi Job Activity Cost pools Cleaning Carpets Travel to Jobs job Support # Activity Rate 8.05 1.30 $ 29.50 ABC Cost 5 $ 75 $ 1 $ 40.25 97.50 29.50 # # $ 167.25 Main Solution : Gallatin carpet cleaning Customer Margin - Activity Based Costing Amounts Per job 140 Sales Costs: Cleaning Carpets Travel to Jobs Job Support 40.25 97.5 29.5 167.25 - 27.25 Customer Margin