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 $22.70 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) | 9,500 | hundred square feet |
| Travel to jobs | Miles driven | 218,500 | miles |
| Job support | Number of jobs | 1,600 | jobs |
| Other (organization-sustaining costs and idle capacity costs) | None | Not applicable |
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The total cost of operating the company for the year is $356,000which includes the following costs:
| | |
| Wages | $ | 137,000 |
| Cleaning supplies | | 32,000 |
| Cleaning equipment depreciation | | 7,000 |
| Vehicle expenses | | 38,000 |
| Office expenses | | 69,000 |
| President’s compensation | | 73,000 |
| Total cost | $ | 356,000 |
|
Resource consumption is distributed across the activities asfollows:
| Distribution of Resource Consumption Across Activities |
| Cleaning Carpets | Travel to Jobs | Job Support | Other | Total |
| Wages | 72 | % | 14 | % | 0 | % | 14 | % | 100 | % |
| Cleaning supplies | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % |
| Cleaning equipment depreciation | 67 | % | 0 | % | 0 | % | 33 | % | 100 | % |
| Vehicle expenses | 0 | % | 82 | % | 0 | % | 18 | % | 100 | % |
| Office expenses | 0 | % | 0 | % | 63 | % | 37 | % | 100 | % |
| President’s compensation | 0 | % | 0 | % | 29 | % | 71 | % | 100 | % |
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Job support consists of receiving calls from potential customers atthe home office, scheduling jobs, billing, resolving issues, and soon.
Required:
1. Prepare the first-stage allocation of costs to the activity costpools.
2. Compute the activity rates for the activity cost pools.
3. The company recently completed a 200 square foot carpet-cleaningjob at the Flying N Ranch—a 59-mile round-trip journey from thecompany’s offices in Bozeman. Compute the cost of this job usingthe activity-based costing system.
4. The revenue from the Flying N Ranch was $45.40 (200 square feet@ $22.70 per hundred square feet). Calculate the customer marginearned on this job.
