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 $22.30 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
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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 $22.30 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 | Activity Measure | Activity for the Year | |
---|---|---|---|
Cleaning carpets | Square feet cleaned (00s) | 9,500 | hundred square feet |
Travel to jobs | Miles driven | 292,000 | miles |
Job support | Number of jobs | 2,000 | jobs |
Other (organization-sustaining costs and idle capacity costs) | None | Not applicable |
The total cost of operating the company for the year is $359,000 which includes the following costs:
Wages | $ 144,000 |
---|---|
Cleaning supplies | 30,000 |
Cleaning equipment |
14,000 |
Vehicle expenses | 30,000 |
Office expenses | 61,000 |
President’s compensation | 80,000 |
Total cost | $ 359,000 |
Resource consumption is distributed across the activities as follows:
Distribution of Resource Consumption Across Activities | |||||
Cleaning Carpets | Travel to Jobs | Job Support | Other | Total | |
---|---|---|---|---|---|
Wages | 77% | 12% | 0% | 11% | 100% |
Cleaning supplies | 100% | 0% | 0% | 0% | 100% |
Cleaning equipment depreciation | 74% | 0% | 0% | 26% | 100% |
Vehicle expenses | 0% | 79% | 0% | 21% | 100% |
Office expenses | 0% | 0% | 56% | 44% | 100% |
President’s compensation | 0% | 0% | 27% | 73% | 100% |
Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.
Required:
- The company recently completed a 800 square foot carpet-cleaning job at the Flying N Ranch—a 51-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system.
- The revenue from the Flying N Ranch was $178.40 (800 square feet @ $22.30 per hundred square feet). Calculate the customer margin earned on this job.
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