Activity$-$Based Costing: A Tool to Aid Decision Making $343$PROBLEM $719$ Second$-$Stage Allocations and Product Margins LO$74,$ LO$75$Pixel Studio, Inc., is a small company that creates computer$-$generated animations for films and television. Much of the companys work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies.The young founders of the company have become increasingly concerned with the eco$-$ nomics of the businessparticularly since many competitors have sprung up recently in the local area. To help understand the companys cost structure, an activity$-$based costing system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the anima$-$ tion goes into production and contract administration begins. Almost all of the work involved in animation production is done by the technical staff, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures are listed below:These activity rates include all of the companys costs, except for its organization$-$sustaining costs and idle capacity costs. There are no direct labor or direct materials costs.Preliminary analysis using these activity rates has indicated that the local commercial seg$-$ ment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid, which results in an unusu$-$ ally low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the local commercial market appear below:The total sales from the $10$ contracts for local commercials was $$180,000.$Required:$1.$ Calculate the cost of serving the local commercial market$\mathrm{.}2.$ Calculate the margin earned serving the local commercial market. $($Remember$,$ this companyhas no direct materials or direct labor costs.$)3.$ What would you recommend to management concerning the local commercial market?PROBLEM $720$ Evaluating the Profitability of Services LO$72,$ LO$73,$ LO$74,$ LO$75$Gallatin Carpet Cleaning is a small, family$-$owned business operating out of Bozeman, Mon$-$ tana$.$ For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $$28$ per hundred square feet. However, there is some question about Activity Cost PoolActivity MeasureActivity RateAnimation concept $................$Number of proposals$$6,040$ per proposalAnimation production $.............$Minutes of completed animation$$7,725$ per minuteContract administration $............$Number of contracts$$6,800$ per contract Activity MeasureLocal CommercialsNumber of proposals $.............................\mathrm{.}25$Minutes of completed animation $...................\mathrm{.}5$Number of contracts $.............................\mathrm{.}10$ gar$47783\_$ch$07\_302-353.$indd $34308/12/1906$:$28$ PM Final PDF to printer $344$ Chapter $7$whether the company is actually making any money on jobs for some customersparticularly those located on remote ranches that require considerable travel time. The owners daughter, home for the summer from college, has suggested investigating this question using activity$-$based cost$-$ ing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below:The total cost of operating the company for the year is $$430,000,$ which includes the following costs: Activity Cost PoolActivity MeasureActivity for the YearCleaning carpets $................$Square feet cleaned $(00$s$)20,000$ hundred square feetTravel to jobs $....................$Miles driven$60,000$ milesJob support $.....................$Number of jobs$2,000$ jobsOther $($organization$-$sustaining costs and idle capacity costs$)...$NoneNot applicable Wages $.............................................$$$150,000$Cleaning supplies $...................................\mathrm{.}40,000$Cleaning equipment depreciation $.....................\mathrm{.}20,000$Vehicle expenses $...................................\mathrm{.}80,000$Office expenses $....................................\mathrm{.}60,000$Presidents compensation $............................\mathrm{.}80,000$ Total cost $...........................................$$$430,000$ Resource consumption is distributed across the activities as follows:Cleaning CarpetsTravel to JobsJob SupportOtherTotalWages $..............................\mathrm{.}70\%20\%0\%10\%100\%$Cleaning supplies $.....................\mathrm{.}100\%0\%0\%0\%100\%$Cleaning equipment depreciation $.......\mathrm{.}80\%0\%0\%20\%100\%$Vehicle expenses $.....................\mathrm{.}0\%60\%0\%40\%100\%$Office expenses $......................\mathrm{.}0\%0\%45\%55\%100\%$Presidents compensation $..............\mathrm{.}0\%0\%40\%60\%100\%$ Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on$.$Required:$1.$ Using Exhibit $76$ as a guide, prepare the first$-$stage allocation of costs to the activity cost pools$\mathrm{.}2.$ Using Exhibit $77$ as a guide, compute the activity rates for the activity cost pools$\mathrm{.}3.$ The company recently completed a $500$ square foot carpet$-$cleaning job at the Flying N Rancha $75-$mile round$-$trip journey from the companys offices in Bozeman. Compute thecost of this job using the activity$-$based costing system$\mathrm{.}4.$ The revenue from the Flying N Ranch was $$140(500$ square feet @ $$28$ per hundred squarefeet$).$ Using Exhibit $712$ as a guide, calculate the customer margin earned on this job$\mathrm{.}5.$ What do you conclude concerning the profitability of the Flying N Ranch job? Explain$\mathrm{.}6.$ What advice would you give the president concerning pricing jobs in the future?