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 $23.25 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)	13,500	hundred square feet
Travel to jobs	Miles driven	232,500	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 $353,000 which includes the following costs:

Wages	$	143,000
Cleaning supplies		27,000
Cleaning equipment depreciation		13,000
Vehicle expenses		33,000
Office expenses		57,000
President’s compensation		80,000
Total cost	$	353,000

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	70	%	11	%	0	%	19	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	66	%	0	%	0	%	34	%	100	%
Vehicle expenses	0	%	85	%	0	%	15	%	100	%
Office expenses	0	%	0	%	62	%	38	%	100	%
President’s compensation	0	%	0	%	27	%	73	%	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.

	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 Hundrted
Travel to jobs	?	Per Mile
Job Support	?	Per Job

3. The company recently completed a 400 square foot carpet-cleaning job at the Flying N Ranch—a 51-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system.

Cost of the Job

?

4. The revenue from the Flying N Ranch was $93.00 (400 square feet @ $23.25 per hundred square feet). Calculate the customer margin earned on this job.

Customer Margin

?

Answer 1

1
	Cleaning Carpets	Travel to Jobs	Job support	Other	Total
Wages	100100	15730	0	27170	143000
Cleaning supplies	27000	0	0	0	27000
Cleaning equipment depreciation	8580	0	0	4420	13000
Vehicle expenses	0	28050	0	4950	33000
Office expense	0	0	35340	21660	57000
President’s compensation	0	0	21600	58400	80000
Total cost	135680	43780	56940	116600	353000
2
Activity Cost Pool	Activity Rate
Cleaning carpets	10.05	per hundred square feet	=135680/13500
Travel to jobs	0.19	per mile	=43780/232500
Job support	29.97	per job	=56940/1900
3
Activity Cost Pool	Activity Rate	Activity	Total
Cleaning carpets	10.05	4	40.20
Travel to jobs	0.19	51	9.69
Job support	29.97	1	29.97
			79.86
Cost of the job $79.86
4
	Customer Margin—Activity-Based Costing
Sales		93.00
Costs:
Cleaning carpets	40.20
Travel to jobs	9.69
Job support	29.97	79.86
Customer margin		13.14