Chapter 7: Mead Cleaning Company Graded Homework Assignment

Fall 2017

Mead Cleaning Company is a family-owned business operating out of Bozeman, Montana. For its home carpet cleaning services, the company has always charged a flat fee based on one hundred square feet of carpet cleaned. The current fee is $30 per hundred square feet.

The Mead Company home carpet-cleaning fee is a step cost to the customers. For example, the minimum charge for a Mead carpet-cleaning technician to come to a customers location is $30. If a customer has 101 to 199 square feet of carpet to clean, the fee is $60 ($30 x 2). The Mead family believes this fee structure provides enough revenue to cover its travel costs and provide a profit.

However, Chris Fenwick, the companys accountant, is becoming concerned that the company might actually not be covering all costs on jobs for some customers. Chris is particularly concerned about the jobs done for ranchers that require considerable travel time. Recently Chris talked with Lee Mead, the current CEO, and Pat Mead, the home carpet-cleaning service manager, about these concerns and suggested that a simple activity-based costing system be implemented.

After some discussion, Lee and Pat decided on three activity cost pools and their activity measures. This information is presented in Table 1. The job support activity pool consists of costs related to receiving calls from potential customers, scheduling jobs, billing, resolving issues, etc.

Table 1 Overhead Activity Cost Pools & Activity Measures
Activity Cost Pool	Activity Measure	Activity for the Year
Cleaning carpets	100 square feet	20,000	blocks of 100 square feet
Travel to/from jobs	Miles driven	60,000	miles
Job support	Number of jobs	2,000	jobs
Other*	None	Not applicable

* Organization-sustaining costs and idle capacity costs

The total cost of operating the home carpet cleaning services for the year is $430,000 as shown in Table 2.

Table 2 Total Home Carpet Cleaning Service Costs
Wages	$150,000
Cleaning supplies	$40,000
Cleaning equipment depreciation	20,000
Vehicle expenses	80,000
Office expenses	60,000
Pat Meads salary	80,000
Total Costs	$430,000

After due consideration, Chris, Lee, and Pat decided to include wages in the overhead activity pools because the technicians also talk with customers who have problems or complaints and work on the company vehicles when needed. Additionally, both of the support staff employees are trained to go out on jobs and do so if needed. Pat strongly believes that asking the technicians and support staff to log how they spent their time would not be helpful and probably would not be received well by the employees. Because of this concern, Lee and Pat decided on how the wages cost will be allocated to the four cost pools based on their experience with the company. All other distributions of resource consumption across the activities (cost pools) were based on corporate records.

Upon review of Meads processes, Chris, Lee and Pat agreed that the cleaning supplies could be treated as a direct cost. Customers will be billed for the number of bottles of cleaning and stain-removing solution opened at their location.

Resource consumption will be distributed across the activities (cost pools) as shown in Table 3.

Table 3 Distribution of Resource Consumption Across Activities (Cost Pools)
Home Carpet Cleaning Service Overhead Costs	Cleaning Carpets	Travel to/from Jobs	Job Support	Other	Total
Wages	70%	20%	5%	5%	100%
Cleaning equipment depreciation	70%	0%	0%	30%	100%
Vehicle expenses	0%	55%	0%	45%	100%
Office expenses	0%	0%	40%	60%	100%
Pat Meads salary	0%	0%	40%	60%	100%

Requirements:

Using the information presented above, perform the following calculations.

1. Allocate the costs presented in Table 2 to the appropriate activity cost pools (first stage allocation). If a cost is not allocated to a cost pool, enter 0 in the appropriate cell for that cost.

2. Compute the activity rates for each activity cost pool. Round calculations to the nearest cent.

3. Mead Company recently completed a 5 hundred square foot carpet-cleaning job at the Circle H Ranch a 50-mile one-way trip from the companys location in Bozeman. Cleaning supplies totaling $23.50 were used on the job. Compute the overhead costs of this job assuming the activity rates listed in the table provided (DO NOT USE THE RATES YOU CALCUALTED IN PART 2) (second stage allocation).

4. Calculate the margin of the Circle H Ranch job using the following:

a. Sales: the current fee of $30 per hundred square feet.

b. Costs: the ABC overhead costs you calculated in Part 3 and any direct costs given in the assignment.