Gallatin Carpet Cleaning is a small, family-owned businessoperating out of Bozeman, Montana. For its services, the companyhas always charged a flat fee per hundred square feet of carpetcleaned. The current fee is $23.25 per hundred square feet.However, there is some question about whether the company isactually making any money on jobs for some customers—particularlythose located on remote ranches that require considerable traveltime. The owner’s daughter, home for the summer from college, hassuggested investigating this question using activity-based costing.After some discussion, she designed a simple system consisting offour activity cost pools. The activity cost pools and theiractivity 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 | 328,500 | miles |
| Job support | Number of jobs | 2,000 | jobs |
| Other (organization-sustaining costs and idle capacitycosts) | None | Not applicable |
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The total cost of operating the company for the year is $349,000which includes the following costs:
| | |
| Wages | $ | 138,000 |
| Cleaning supplies | | 27,000 |
| Cleaning equipment depreciation | | 7,000 |
| Vehicle expenses | | 38,000 |
| Office expenses | | 61,000 |
| President’s compensation | | 78,000 |
| Total cost | $ | 349,000 |
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Resource consumption is distributed across the activities asfollows:
| Distribution of Resource Consumption AcrossActivities |
| Cleaning Carpets | Travel to Jobs | Job Support | Other | Total |
| Wages | 80 | % | 15 | % | 0 | % | 5 | % | 100 | % |
| Cleaning supplies | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % |
| Cleaning equipment depreciation | 70 | % | 0 | % | 0 | % | 30 | % | 100 | % |
| Vehicle expenses | 0 | % | 82 | % | 0 | % | 18 | % | 100 | % |
| Office expenses | 0 | % | 0 | % | 59 | % | 41 | % | 100 | % |
| President’s compensation | 0 | % | 0 | % | 27 | % | 73 | % | 100 | % |
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Job support consists of receiving calls from potential customersat the home office, scheduling jobs, billing, resolving issues, andso on.
Required:
1. Prepare the first-stage allocation of costs to the activitycost pools.
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| | Cleaning Carpets | Travel to Jobs | Job Support | Other | Total | | Wages | | | | | | | Cleaning supplies | | | | | | | Cleaning equipment depreciation | | | | | | | Vehicle expenses | | | | | | | Office expenses | | | | | | | President’s compensation | | | | | | | Total cost | | | | |
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2. Compute the activity rates for the activity cost pools
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| | Activity Cost Pool | Activity Rate | | | Cleaning carpets | | per hundred square feet | | Travel to jobs | | per mile | | Job support | | per job |
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3. The company recently completed a 800 square footcarpet-cleaning job at the Flying N Ranch—a 59-mile round-tripjourney from the company’s offices in Bozeman. Compute the cost ofthis job using the activity-based costing system.
4. The revenue from the Flying N Ranch was $186.00 (800 squarefeet @ $23.25 per hundred square feet). Calculate the customermargin earned on this job.
