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 $22.10 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 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) 11,500 hundred square feet Travel to jobs Miles driven 157,500 miles Job support Number of jobs 1,900 jobs Other (organization-sustaining costs and idle capacity costs) None Not applicable The total cost of operating the company for the year is $340,000 which includes the following costs: Wages $ 138,000 Cleaning supplies 23,000 Cleaning equipment depreciation 15,000 Vehicle expenses 26,000 Office expenses 65,000 President’s compensation 73,000 Total cost $ 340,000 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 79 % 13 % 0 % 8 % 100 % Cleaning supplies 100 % 0 % 0 % 0 % 100 % Cleaning equipment depreciation 72 % 0 % 0 % 28 % 100 % Vehicle expenses 0 % 80 % 0 % 20 % 100 % Office expenses 0 % 0 % 63 % 37 % 100 % President’s compensation 0 % 0 % 25 % 75 % 100 % 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 800 square foot carpet-cleaning job at the Flying N Ranch—a 59-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 $176.80 (800 square feet @ $22.10 per hundred square feet). Calculate the customer margin earned on this job. Answer 1. Prepare the first-stage allocation of costs to the activity cost pools. Cleaning carpets Travel to jobs Job support other total Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President’s compensation Total cost 2. Compute the activity rates for the activity cost pools. Activity cost pool Activity rate Cleaning carpets Per hundred square feet Travel to jobs Per mile Job support Per job 3. The company recently completed a 800 square foot carpet-cleaning job at the Flying N Ranch—a 59-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system. Activity cost pool Activity rate Activity total Cleaning carpets Travel to jobs Job support Cost for this job 4. The revenue from the Flying N Ranch was $176.80 (800 square feet @ $22.10 per hundred square feet). Calculate the customer margin earned on this job. Customer margin activity based costing Sales Costs Cleaning carpet Travel to jobs Job support Customer margin

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	109020	17940	0	11040	138000
Cleaning supplies	23000	0	0	0	23000
Cleaning equipment depreciation	10800	0	0	4200	15000
Vehicle expenses	0	20800	0	5200	26000
Office expense	0	0	40950	24050	65000
President’s compensation	0	0	18250	54750	73000
Total cost	142820	38740	59200	99240	340000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	12.42	per hundred square feet	=142820/11500
Travel to jobs	0.25	per mile	=38740/157500
Job support	31.16	per job	=59200/1900
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	12.42	8	99.36
Travel to jobs	0.25	59	14.75
Job support	31.16	1	31.16
			145.27
Cost of this job $145.27
4
	Customer Margin—Activity-Based Costing
Sales		176.80
Costs:
Cleaning carpets	99.36
Travel to jobs	14.75
Job support	31.16	145.27
Customer margin		31.53