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 $23.80 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)
|
10,500
|
hundred square feet
|
|
Travel to jobs
|
Miles driven
|
325,500
|
miles
|
|
Job support
|
Number of jobs
|
2,000
|
jobs
|
|
Other (costs of idle capacity and
organization-sustaining costs)
|
None
|
Not applicable
|
The total cost of operating the company for the year is $365,000, which includes the following costs:
|
|
|
|
Wages
|
$
|
148,000
|
|
Cleaning supplies
|
|
21,000
|
|
Cleaning equipment depreciation
|
|
12,000
|
|
Vehicle expenses
|
|
40,000
|
|
Office expenses
|
|
69,000
|
|
President's compensation
|
|
75,000
|
|
|
|
|
Total cost
|
$
|
365,000
|
|
|
|
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
|
%
|
16
|
%
|
0
|
%
|
7
|
%
|
100
|
%
|
|
Cleaning supplies
|
100
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
100
|
%
|
|
Cleaning equipment depreciation
|
70
|
%
|
0
|
%
|
0
|
%
|
30
|
%
|
100
|
%
|
|
Vehicle expenses
|
0
|
%
|
79
|
%
|
0
|
%
|
21
|
%
|
100
|
%
|
|
Office expenses
|
0
|
%
|
0
|
%
|
58
|
%
|
42
|
%
|
100
|
%
|
|
President's compensation
|
0
|
%
|
0
|
%
|
27
|
%
|
73
|
%
|
100
|
%
|
|
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 4 hundred square foot carpet-cleaning job at the Flying N ranch-a 58.00-mile round-trip journey from the company's offices in Bozeman. Compute the cost of this job using the activity-based costing system
|