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, 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) 20,000 hundred square feet Travel to jobs Miles driven 60,000 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 $430,000 which includes the following costs:         Wages $ 150,000 Cleaning supplies   40,000 Cleaning equipment depreciation   20,000 Vehicle expenses   80,000 Office expenses   60,000 President’s compensation   80,000 Total cost $ 430,000     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 70 % 20 % 0 % 10 % 100 % Cleaning supplies 100 % 0 % 0 %  0 % 100 % Cleaning equipment depreciation 80 % 0 % 0 % 20 % 100 % Vehicle expenses 0 % 60 % 0 % 40 % 100 % Office expenses 0 % 0 % 45 % 55 % 100 % President’s compensation 0 % 0 % 40 % 60 % 100 %     Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.   Required: 3. The company recently completed a 500 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. 4. The revenue from the Flying N Ranch was $140 (500 square feet @ $28 per hundred square feet). Calculate the customer margin earned on this job.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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, 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) 20,000 hundred square feet
Travel to jobs Miles driven 60,000 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 $430,000 which includes the following costs:

 

     
Wages $ 150,000
Cleaning supplies   40,000
Cleaning equipment depreciation   20,000
Vehicle expenses   80,000
Office expenses   60,000
President’s compensation   80,000
Total cost $ 430,000
 

 

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 70 % 20 % 0 % 10 % 100 %
Cleaning supplies 100 % 0 % 0 %  0 % 100 %
Cleaning equipment depreciation 80 % 0 % 0 % 20 % 100 %
Vehicle expenses 0 % 60 % 0 % 40 % 100 %
Office expenses 0 % 0 % 45 % 55 % 100 %
President’s compensation 0 % 0 % 40 % 60 % 100 %
 

 

Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

 

Required:

3. The company recently completed a 500 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.

4. The revenue from the Flying N Ranch was $140 (500 square feet @ $28 per hundred square feet). Calculate the customer margin earned on this job.

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