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 $24.00 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 11,000 hundred square feet 57,000 miles 1,800 jobs None Not applicable The total cost of operating the company for the year is $353,000 which includes the following costs: Wages cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President's compensation Total cost $ 138,000 33,000 19,000 25,000 61,000 77,000 $ 353,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption Across Activities Cleaning Travel Carpets to Jobs Wages 74% 12% Job other Support 0% Other 14% Total 100%

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	102120	16560	0	19320	138000
Cleaning supplies	33000	0	0	0	33000
Cleaning equipment depreciation	14250	0	0	4750	19000
Vehicle expenses	0	18750	0	6250	25000
Office expense	0	0	37210	23790	61000
President’s compensation	0	0	22330	54670	77000
Total cost	149370	35310	59540	108780	353000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	13.58	per hundred square feet	=149370/11000
Travel to jobs	0.62	per mile	=35310/57000
Job support	33.08	per job	=59540/1800
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	13.58	6	81.48
Travel to jobs	0.62	54	33.48
Job support	33.08	1	33.08
			148.04
Cost of the job $148.04
4
	Customer Margin—Activity-Based Costing
Sales		144.00
Costs:
Cleaning carpets	81.48
Travel to jobs	33.48
Job support	33.08	148.04
Customer margin		-4.04