Gallatin Carpet Cleaning is a small, family-owned business operating out of Boze
ID: 2539151 • Letter: G
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 $22.60 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:
The total cost of operating the company for the year is $332,000 which includes the following costs:
Resource consumption is distributed across the activities as follows:
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.
3. The company recently completed a 400 square foot carpet-cleaning job at the Flying N ranch—a 56-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system.
4. The revenue from the Flying N ranch was $90.40 (400 square feet @ $22.60 per hundred square feet). Calculate the customer margin earned on this job.
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 439,000 miles Job support Number of jobs 1,700 jobs Other (organization-sustaining costs and idle capacity costs) None Not applicableExplanation / Answer
Answer
Cleaning Carpets
Travel to Jobs
Job Support
Other
Total
Total Cost
%
Allocated
%
Allocated
%
Allocated
%
Allocated
%
Allocated
Wages
137000
73
100010
10
13700
0
0
17
23290
100
137000
Cleaning supplies
21000
100
21000
0
0
0
0
0
0
100
21000
Cleaning equipment depreciation
11000
71
7810
0
0
0
0
29
3190
100
11000
Vehicle expenses
31000
0
0
84
26040
0
0
16
4960
100
31000
Office expenses
56000
0
0
0
0
58
32480
42
23520
100
56000
President’s compensation
76000
0
0
0
0
29
22040
71
53960
100
76000
Total
$332000
Total
$128820
Total
$39740
Total
$54520
Total
$108920
Total
$332000
Overhead cost
Activity for year
Activity Rate per activity
Cleaning Carpets
128820
9500
hundred sqr feet
$13.56
Travel to Jobs
39740
439000
miles
$0.090523918
Job Support
54520
1700
jobs
$32.07058824
Other
108920
N/A
Total Overhead cost
$332000
Activity Rate per activity ($)
No. of activity
Cost allocated ($)
Cleaning Carpets
13.56
400 sqr feet
54.24
Travel to Jobs
0.090523918
56 miles
5.07
Job Support
32.07058824
1 job
32.07
Total Cost
$91.38
Revenues = $90.40
Cost assigned = $91.38
Margin earned = 90.4 – 91.38 = ($0.98)- Negative margin
Cleaning Carpets
Travel to Jobs
Job Support
Other
Total
Total Cost
%
Allocated
%
Allocated
%
Allocated
%
Allocated
%
Allocated
Wages
137000
73
100010
10
13700
0
0
17
23290
100
137000
Cleaning supplies
21000
100
21000
0
0
0
0
0
0
100
21000
Cleaning equipment depreciation
11000
71
7810
0
0
0
0
29
3190
100
11000
Vehicle expenses
31000
0
0
84
26040
0
0
16
4960
100
31000
Office expenses
56000
0
0
0
0
58
32480
42
23520
100
56000
President’s compensation
76000
0
0
0
0
29
22040
71
53960
100
76000
Total
$332000
Total
$128820
Total
$39740
Total
$54520
Total
$108920
Total
$332000
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