Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services,...
Question:
Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $22.95 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 more 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) | 10,000 hundred square feet |
| Travel to jobs | Miles driven | 50,000 miles |
| Job support | Number of jobs | 1,800 jobs |
| Other (organization-sustaining and idle capacity costs) | None | Not applicable |
The total cost of operating the company for the year is $340,000, which includes the following costs:
| Wages | $140,000 |
| Cleaning supplies | 25,000 |
| Cleaning equipment depreciation | 10,000 |
| Vehicle expenses | 30,000 |
| Office expenses | 60,000 |
| President's compensation | 75,000 |
| Total cost | $340,000 |
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 | 75% | 15% | 0% | 10% | 100% |
| Cleaning supplies | 100% | 0% | 0% | 0% | 100% |
| Cleaning equipment depreciation | 70% | 0% | 0% | 30% | 100% |
| Vehicle expenses | 0% | 80% | 0% | 20% | 100% |
| Office expenses | 0% | 0% | 60% | 40% | 100% |
| President's compensation | 0% | 0% | 30% | 70% | 100% |
Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.
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 6 hundred square-foot carpet-cleaning job at the Lazy Bee Ranch-a 52-mile round-trip from the company's offices in Eagle-Vail. Compute the cost of this job using the activity-based costing system.
Implementing Activity-Based Costing
To implement an activity-based costing system, activity cost pools and cost drivers must be identified, and the total overhead cost must be allocated to these cost pools in order to calculate the cost drivers.
Answer and Explanation: 1
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1.
| Cost item | Overhead Cost | Allocated to Cleaning Carpets | Allocated to Travel to Jobs | Allocated to Job Support | Allocated to Other |
|---|---|---|---|---|---|
| Wages | $140,000 | $1... |
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Chapter 7 / Lesson 3Activity-based costing takes into account the activities needed to complete products, including the associated costs of each activity. Discover the seven steps of activity-based costing and learn how it is used in organizations.