Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services,...


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 supplies25,000
Cleaning equipment depreciation10,000
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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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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Learn more about this topic:

The Seven Steps of Activity-Based Costing


Chapter 7 / Lesson 3

Activity-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.

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