Problem - Profitability
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 (costs of idle capacity and organization-sustaining 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
|
|
|
$ 430,000
|
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 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.
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?
Reference: Noreen, E. W., Brewer, P. B., Garrison R. H. (2011). Managerial accounting for managers (2nd ed.). New York, NY: McGraw Hill.