Gallatin Carpet Cleaning is a small, family-owned business operating out of Boze

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 $28 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, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below:

The total cost of operating the company for the year is $430,000, which includes the following costs:

Resource consumption is distributed across the activities as follows:

Distribution of Resource Consumption Across Activities

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.

2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.)

3. The company recently completed a 5 hundred square foot carpet-cleaning job at the Flying N ranch—a 75-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system. (Round your intermediate calculations and final answer to 2 decimal places.)

4. The revenue from the Flying N ranch was $140 (5 hundred square feet at $28 per hundred square feet). Prepare a report showing the margin from this job. (Round your intermediate calculations and final answers to 2 decimal places.)

Activity Cost Pool Activity Measure Activity for the Year Cleaning carpets Square feet cleaned (00s) 20,000 hundred square feet Travel to jobs Miles driven 60,000 miles Job support Number of jobs 2,000 jobs Other (costs of idle capacity
and organization-sustaining costs) None Not applicable

Explanation / Answer

1) First Stage Allocation of Cost to Activity Cost Pools (Amounts in $)

2) Calculation of Activity Rates (Amounts in $)

3) Cost of Job = Cleaning supplies+Travel to Jobs+Job Support

= ($8.05*5 hundred sq.ft)+($1.30*75 miles)+$29.50

= $40.25+$97.50+$29.50 = $167.25

4) Product Margin = Sales revenue - Total cost of job (as calculated in req. 3)

= $140 - $167.25 = -$27.25 (product margin is negative)

Particulars Cleaning Carpets Travel to Jobs Job Support Other Wages (70:20:0:10) 105,000 30,000 0 15,000 Cleaning Supplies (100:0:0:0) 40,000 0 0 0 Cleaning equipment depreciation (80:0:0:20) 16,000 0 0 4,000 Vehicle expenses (0:60:0:40) 0 48,000 0 32,000 Office expenses (0:0:45:55) 0 0 27,000 33,000 President’s compensation (0:0:40:60) 0 0 32,000 48,000 Total 161,000 78,000 59,000 132,000

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