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 $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: Activity Cost Pool Cleaning carpets Travel to jobs Job support Other (organization-sustaining costs and Activity Measure Square feet cleaned (00s) Miles driven Number of jobs Activity for the Year 7,500 hundred square feet 438,500 miles 1,600 jobs idle capacity costs) None Not applicable The total cost of operating the company for the year is $368,000 which includes the following costs Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expense President's compensation Total cost $136,000 33,000 17,000 38,000 65,000 79,000 $368,000

Explanation / Answer

Requirement 1: Preparation if first stage allocation of costs to the activity cost pools: Cleaning Carpets Travel to jobs Job Support Other Total Wages 100640 14960 20400 136000 Cleaning Supplies 33000 33000 Cleaning Equipment Depreciation 11900 5100 17000 Vehicle Expenses 31540 6460 38000 Office Expenses 35750 29250 65000 President's Compensation 26860 52140 79000 Total Cost 145540 46500 62610 113350 368000 Requirement 2: Computation of Activity Rates for the Activity Cost Pools: Activity Cost Pool Activity Rate Cleaning Carpets 145540/7500 19.41 per hundred sq ft Travel to Jobs 46500/438500 0.11 per mile Job Support 62610/1600 39.13 per job Requirement 3: Computation of Cost of job: Cleaning Carpets 19.41*6 116.46 Travel to jobs 0.11*55 6.05 job support 39.13 Cost of job 161.64 Requirement 4: Calculation of Contribution Margin: Revenue 135.6 Cost of job 116.46+6.05 122.51 Contribution Margin 135.6-122.51 13.09

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