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:
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 None Not applicable
(costs of idle capacity and organization-sustaining costs)
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
Resource consumption is distributed across the activities as follows:
Distribution of Resource Consumption Across Activities
Cleaning Travel to Job
Carpets Jobs Support Other Total
Wages 70% 20% 0% 10% 100%
Cleaning supplies 100% 0% 0% 0% 100%
Cleaning equipment depr. 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.
- Prepare the first-stage allocation of costs to the activity cost pools.
- Compute the activity rates for the activity cost pools.
- 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.
- The revenue from the Flying N ranch was $140 (5 hundred square feet @ $28 per hundred square feet). Prepare a report showing the margin from this job.
- What do you conclude concerning the profitability of the Flying N ranch job? Explain.
- What advice would you give the president concerning pricing jobs in the future?
This solution illustrates how to allocate costs to activity pools, determine the activity rate for each activity pool, and use those rates to determine the profitability of individual jobs. Attached as Excel.