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 $28.00 per hundred square feet. A cost of $21.50 per square foot was computed by taking $430,000/20,000 hundred square feet = $21.50 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 seems to be adequate. The activty cost pools and their activity measures appear below. Activity Cost pool Activity measure Activity for the year Cleaning carpets Square feet cleaned 2,000,000 square feet Travel to jobs Miles driven 60,000 miles Job support Number of jobs 2,000 jobs Other Hours of work 50,000 hours The total cost of operating the company for the year is $430,000, which includes the following costs:

Exhibit 1--Total Costs of the Company Wages $150,000 Cleaning supplies 40,000 Cleaning equipment depreciation 20,000 Vehicle expenses 80,000 Office expenses 60,000 Presidents' compensation 80,000 Total Cost $430,000 Since the business is small, workers that clean carpets also do other activities. The vehicles are used for cleaning carpets and other activities. The president will help with job support and administrative activities. Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on. Because of this, allocates all costs. Therefore, the entire $430,000 needs to be allocated.

The distribution of costs by Activity Cost Pool is as follows: Exhibit 2--Distribution of Costs by Activity Cost Pool Cleaning Travel Job Carpet to Jobs Support Other Total Wages 70% 20% 10% 100% Cleaning supplies 100% 100% Cleaning equipment depreciation 80% 20% 100% Vehicle expenses 60% 40% 100% Office expenses 45% 55% 100% Presidents' compensation 40% 60% 100%

Requirement 4: Compute the profit for the Flying Ranch Job: Using the original Using ABC costing method Revenue: Total Costs Profit

Requirement 5: Specifically, which activities accounted for the difference in cost between original costing and ABC?

Requirement 6: What advice would you give the president concerning pricing jobs in the future?