Question

Problem 7-20 Evaluating the Profitability of Services [LO7-2, LO7-3, LO7-4, LO7-5] 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 $22.30 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some c 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: those located on remote Activity Cost Pool Cleaning carpets Travel to jobs Job support Other (costs of idle capacity and Activity Measure Activity for the Year 8,000 hundred square feet Square feet cleaned (00s) Miles driven Number of jobs 374,500 miles 1,800 jobs Not applicable The total cost of operating the company for the year is $362,000, which includes the following costs Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses $149,000 32,000 11,000 29,000 67,000 74,000 Total cost $ 362,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption Across Activities Cleaning Travel to Job Carpets Jobs Support Other Total 12% 100% 73% 100% 15% Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses 0% 100% 67% 0% 0% 64' 33% 22% 100% 100% 78% 0% 0% 36% 69% 100% 100% 31%

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	108770	22350	0	17880	149000
Cleaning supplies	32000	0	0	0	32000
Cleaning equipment depreciation	7370	0	0	3630	11000
Vehicle expenses	0	22620	0	6380	29000
Office expense	0	0	42880	24120	67000
President’s compensation	0	0	22940	51060	74000
Total cost	148140	44970	65820	103070	362000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	18.52	per hundred square feet	=148140/8000
Travel to jobs	0.12	per mile	=44970/374500
Job support	36.57	per job	=65820/1800
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	18.52	2	37.04
Travel to jobs	0.12	60	7.20
Job support	36.57	1	36.57
			80.81
Cost of the job $80.81
4
	Customer Margin—Activity-Based Costing
Sales		44.60
Costs:
Cleaning carpets	37.04
Travel to jobs	7.20
Job support	36.57
		80.81
Customer margin		-36.21