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 $22.15 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 | Activity Measure | Activity for the Year | |
| Cleaning carpets | Square feet cleaned (00s) | 12,000 | hundred square feet |
| Travel to jobs | Miles driven | 301,500 | miles |
| Job support | Number of jobs | 1,700 | jobs |
| Other (organization-sustaining costs and idle capacity costs) | None | Not applicable | |
The total cost of operating the company for the year is $359,000 which includes the following costs:
| Wages | $ | 141,000 |
| Cleaning supplies | 32,000 | |
| Cleaning equipment depreciation | 18,000 | |
| Vehicle expenses | 26,000 | |
| Office expenses | 58,000 | |
| President’s compensation | 84,000 | |
| Total cost | $ | 359,000 |
Resource consumption is distributed across the activities as follows:
| Distribution of Resource Consumption Across Activities | ||||||||||
| Cleaning Carpets | Travel to Jobs | Job Support | Other | Total | ||||||
| Wages | 72 | % | 12 | % | 0 | % | 16 | % | 100 | % |
| Cleaning supplies | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % |
| Cleaning equipment depreciation | 69 | % | 0 | % | 0 | % | 31 | % | 100 | % |
| Vehicle expenses | 0 | % | 77 | % | 0 | % | 23 | % | 100 | % |
| Office expenses | 0 | % | 0 | % | 62 | % | 38 | % | 100 | % |
| President’s compensation | 0 | % | 0 | % | 30 | % | 70 | % | 100 | % |
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 400 square foot carpet-cleaning job at the Flying N Ranch—a 55-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 $88.60 (400 square feet @ $22.15 per hundred square feet). Calculate the customer margin earned on this job.
Solution 1:
| First stage allocation of cost to activity cost pools | |||||||||
| Particulars | Total Cost | Cleaning Carpets | Travel to Jobs | Job Support | Others | ||||
| % | Amount | % | Amount | % | Amount | % | Amount | ||
| Wages | $141,000.00 | 72% | $101,520.00 | 12% | $16,920.00 | 0% | $0.00 | 16% | $22,560.00 |
| Cleaning Supplies | $32,000.00 | 100% | $32,000.00 | 0% | $0.00 | 0% | $0.00 | 0% | $0.00 |
| Cleaning Equipment depreciation | $18,000.00 | 69% | $12,420.00 | 0% | $0.00 | 0% | $0.00 | 31% | $5,580.00 |
| Vehicle Expenses | $26,000.00 | 0% | $0.00 | 77% | $20,020.00 | 0% | $0.00 | 23% | $5,980.00 |
| Office Expense | $58,000.00 | 0% | $0.00 | 0% | $0.00 | 62% | $35,960.00 | 38% | $22,040.00 |
| President's Compensation | $84,000.00 | 0% | $0.00 | 0% | $0.00 | 30% | $25,200.00 | 70% | $58,800.00 |
| Total | $359,000.00 | $145,940.00 | $36,940.00 | $61,160.00 | $114,960.00 | ||||
Solution 2:
| Determination of activity rate for each activity | ||||
| Activity | Estimated Overhead Cost | Activity Base | Usage of Activity Base | Activity Rate |
| Cleaning Carpets | $145,940.00 | Square feet cleaned | 12000 | $12.16 |
| Travel to Jobs | $36,940.00 | Miles driven | 301500 | $0.12 |
| Job Support | $61,160.00 | Nos of jobs | 1700 | $35.98 |
| Other | $114,960.00 | No allocation | ||
| Total | $359,000.00 | |||
Solution 3:
| Computation of Job Cost | |
| Particulars | Amount |
| Cleaning Carpet (4*$12.16) | $48.64 |
| Travel to Jobs (55*$0.12) | $6.60 |
| Job Support | $35.98 |
| Total Cost | $91.22 |
Solution 4:
| Customer Margin - Activity based costing | ||
| Particulars | Amount | |
| Revenue | $88.60 | |
| Costs: | ||
| Cleaning Carpet | $48.64 | |
| Travel to Jobs | $6.60 | |
| Job Support | $35.98 | |
| Total Cost | $91.22 | |
| Customer Margin | -$2.62 | |
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services,...
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 $22.10 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...
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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 $22.15 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...
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 $23.10 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...
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