PROBLEM 7-20 Evaluating the Profitability of Services (L07-2, LO7-3, L07-4, L07-5] 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 ........... Travel to jobs. Job support .................. Other (costs of idle capacity and organization-sustaining costs)... Square feet cleaned (OOS) Miles driven Number of jobs 20,000 hundred square feet 60,000 miles 2,000 jobs None Not applicable The total cost of operating the company for the year is $430,000, which includes the fol- lowing costs: Wages ............. Cleaning supplies ...... Cleaning equipment depreciation. Vehicle expenses Office expenses ... President's compensation ........ Total cost $150,000 40,000 20,000 80,000 60,000 80,000 $430,000 Resource consumption is distributed across the activities as follows: Total 20% Distribution of Resource Consumption Across Activities Cleaning Travel to Carpets Jobs Wages ....................... 70% Cleaning supplies ..... 100% 0% Cleaning equipment depreciation .. 80% 0% Vehicle expenses ..... 0% 60% Office expenses ....... ...... 0% 0% President's compensation .... 0% 0% 88888 Job Support 0% 0% 0% 0% 45% 40% Other 10% 0% 20% 40% 55% 60% 100% 100% 100% 100% 100% 100% Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on. Required: 1. Using Exhibit 7–6 as a guide, prepare the first stage allocation of costs to the activity cost pools. 2. Using Exhibit 7-7 as a guide, compute the activity rates for the activity cost pools. 3. 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. 4. The revenue from the Flying N ranch was $140 (5 hundred square feet @ $28 per hundred square feet). Using Exhibit 7-12 as a guide, prepare a report showing the margin from this job. 5. What do you conclude concerning the profitability of the Flying N ranch job? Explain. 6. What advice would you give the president concerning pricing jobs in the future?
Related questions
| 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 $23.40 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customersâparticularly those located on remote ranches that require considerable travel time. The ownerâs 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) | 8,500 | hundred square feet |
| Travel to jobs | Miles driven | 287,000 | miles |
| Job support | Number of jobs | 2,100 | jobs |
| Other (costs of idle capacity and organization-sustaining costs) | None | Not applicable | |
| The total cost of operating the company for the year is $350,000, which includes the following costs: |
| Wages | $ | 135,000 |
| Cleaning supplies | 26,000 | |
| Cleaning equipment depreciation | 15,000 | |
| Vehicle expenses | 37,000 | |
| Office expenses | 63,000 | |
| Presidentâs compensation | 74,000 | |
| Total cost | $ | 350,000 |
| 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 | 71 | % | 13 | % | 0 | % | 16 | % | 100 | % |
| Cleaning supplies | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % |
| Cleaning equipment depreciation | 71 | % | 0 | % | 0 | % | 29 | % | 100 | % |
| Vehicle expenses | 0 | % | 80 | % | 0 | % | 20 | % | 100 | % |
| Office expenses | 0 | % | 0 | % | 61 | % | 39 | % | 100 | % |
| Presidentâs compensation | 0 | % | 0 | % | 29 | % | 71 | % | 100 | % |
| Job support consists of receiving calls from potential customers at the home office, scheduling 1.) Prepare the first-stage allocation of costs to the activity cost pools. 2.)
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Gore Range Carpet Cleaning is a family-owned business inEagle-Vail, Colorado. For its services, the company has alwayscharged a flat fee per hundred square feet of carpet cleaned. Thecurrent fee is $22.60 per hundred square feet. However, there issome question about whether the company is actually making anymoney on jobs for some customersâparticularly those located on moreremote ranches that require considerable travel time. The ownerâsdaughter, home for the summer from college, has suggestedinvestigating this question using activity-based costing. Aftersome discussion, a simple system consisting of four activity costpools seemed to be adequate. The activity cost pools and theiractivity measures appear below:
| Activity Cost Pool | ActivityMeasure | Activity for the Year | |
| Cleaning carpets | Square feetcleaned (000s) | 11,000 | hundred squarefeet |
| Travel to jobs | Milesdriven | 85,500 | miles |
| Jobsupport | Number ofjobs | 1,700 | jobs |
| Other (organization-sustaining and idle capacity costs) | None | Notapplicable | |
The total cost of operating thecompany for the year is $352,000, which includes the followingcosts: |
| Wages | $ | 145,000 |
| Cleaning supplies | 21,000 | |
| Cleaning equipment depreciation | 16,000 | |
| Vehicle expenses | 32,000 | |
| Office expenses | 67,000 | |
| Presidentâs compensation | 71,000 | |
| Total cost | $ | 352,000 |
Resource consumption isdistributed across the activities as follows: |
Distribution of Resource Consumption Across Activities | ||||||
| Cleaning Carpets | Travel to Jobs | Job Support | Other | Total | ||||||
| Wages | 79 | % | 13 | % | 0 | % | 8 | % | 100 | % |
| Cleaning supplies | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % |
| Cleaning equipment depreciation | 74 | % | 0 | % | 0 | % | 26 | % | 100 | % |
| Vehicle expenses | 0 | % | 76 | % | 0 | % | 24 | % | 100 | % |
| Office expenses | 0 | % | 0 | % | 61 | % | 39 | % | 100 | % |
| Presidentâs compensation | 0 | % | 0 | % | 29 | % | 71 | % | 100 | % |
| Job supportconsists of receiving calls from potential customers at the homeoffice, scheduling jobs, billing, resolving issues, and so on. |
| Required: |
| 1. | Prepare the first-stage allocation of costs to the activity costpools. |
| 2. | Compute theactivity rates for the activity cost pools. (Round youranswers to 2 decimal places.) |
| 3. | The company recently completed a 2 hundred square-footcarpet-cleaning job at the Lazy Bee Ranchâa 57.00-mile round-tripfrom the companyâs offices in Eagle-Vail. Compute the cost of thisjob using the activity-based costing system. (Round yourintermediate and final answers to 2 decimal places.) |
| 4. | The revenue from the Lazy Bee Ranch was $45.20 (2 hundredsquare-feet at $22.60 per hundred square feet). Prepare a reportshowing the margin from this job. (Negative customermargins should be indicated by a minus sign. Round yourintermediate calculations and final answers to 2 decimalplaces.) |
Question #2:
McAndrewâs Snow Removal is a small, family-owned snow removal business. For its services, a flat fee of $14.75 per hundred square meters is charged. The son (Conor) of the owner of McAndrewâs Snow Removal has recently learned about ABC in her university accounting course @ Dal. He is starting to wonder whether the company is losing money on certain jobs, specifically jobs that require a significant amount of travel time. He decides to do his first co-op job working for the family business, with the main objective of developing an ABC system.
After a lot of hard work, he concludes that 4 Activity Pools are appropriate. The Activity Pools and their activity measures are as follows:
Activity Cost Pool Activity Measure Activity for the Year
| Snow removal | Square meters cleaned (000s) | 32,000 hundred square meters |
| Travel to jobs | Kilometers driven | 15,000 km |
| Job support | Number of jobs | 400 jobs |
| Other (cost of idle capacity, organization sustaining costs, etc) | None | Not applicable |
The total Operating Costs for the year are detailed as follows:
| Wages | $150,000 (80%, 10%, 0%, 10%)* |
| Supplies | $40,000 (100%, 0%, 0%, 0%)* |
| Snow removal equipment depreciation | $20,000 (80%, 0%, 0%, 20%)* |
| Vehicle expenses | $40,000 (0%, 60%, 0%, 40%)* |
| Office expenses | $60,000 (0%, 0%, 45%, 55%)* |
| President compensation | $80,000 (0%, 0%, 40%, 60%)* |
* - percentages represent the respective resource consumption for snow removal, travel to jobs, job support and other.
Required #1: Use Exhibit 7-7 from your textbook as a guide in preparing the first stage allocation of costs to the activity cost pools.
Required #2: use Exhibit 7-8 from your textbook as a guide in computing activity rates for the activity cost pools.
Required #3: The Company recently completed jobs for Slick Joeâs Grocery and Quantum Leap Offices. Details are as follows:
| Slick Joeâs Grocery | Quantum Leap Offices | |
| Square meters cleaned (000âs): | 35 | 35 |
| Travel requirements | 75km | 5km |
Prepare a report showing the margins from each of the above jobs. Use Exhibit 7-12 from your Textbook as a guide.
Required #4: Based on the results of your margin reports, what advice would you give to this Company?
