Rio Carpet Cleaning is a small, family-owned business operating out of Springville, Utah. 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 Cleaning carpets Travel to jobs Activity Measure Square feet cleaned (00s) Miles driven Number of jobs Activity for the Year 20,000 hundred square feet 60,000 miles 2,000 jobs Job support Other (costs of idle capacity and organization-sustaining costs) None Not applicable The total cost of operating the company for the year is $430,000, which includes the following 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: Distribution of Resource Consumption Across Activities Cleaning Travel to Carpets Jobs Wages 70% 20% Cleaning supplies 100% 0% Cleaning equipment depreciation 80% 0% Vehicle expenses 0% 60% Office expenses 0% 0% President's compensation 0% 0% Job Support 0% 0% 0% 0% 45% 40% Other 10% 0% 20% 40% 55% 60% Total 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. 1. Using Exhibit 1 as a guide, prepare the first-stage allocation of costs to the activity cost pools. (5 points) 2. Using Exhibit 2 as a guide, compute the activity rates for the activity cost pools. (5 points) 3. The company recently completed a 500-square-foot carpet-cleaning job at the Flying N ranch - a 75-mile round-trip journey from the company's offices in Draper. Compute the cost of this job using the activity-based costing system. (5 points) 4. The revenue from the Flying N ranch was $140 (500 square feet @ $28 per hundred square feet). Using Exhibit 3 as a guide, prepare a report showing the margin from this job. (5 points) 5. What do you conclude concerning the profitability of the Flying N ranch job? Explain. (5 points) 6. What advice would you give the president concerning pricing jobs in the future? (10 points) Note: Exhibit 1, 2, 3 are described below. You may use them as a guidance but you do not have to exactly follow their formats. First-Stage Allocations to Activity Cost Pools Microsoft Excel - ABC model-Classic Brass.XLS COX Ele Edit View Insert Format Tools Data Window Help Type a question for help --X D - . . 100 , % Arial 10 - BIURE $ %, *8.98 EE A B D D E F G 1 Activity Cost Pools Customer Product Customer 2 Orders Design Order Size Relations Other Totals 4 Production Department 5 Indirect factory wages $ 125,000 $ 200,000 $ 100,000 $50,000 $ 25,000 $500,000 6 Factory equipment depreciation 60,000 0 180,000 0 60.000 300.000 7 Factory utilities 2 12,000 60,000 0 48.000 120,000 8 8 Factory building lease 0 0 0 0 80,000 80.000 10 General Administrative Department: 11 Administrative wages and salaries 60,000 20,000 40,000 120,000 160,000 400,000 12 Office equipment depreciation 15,000 0 0 12.500 22,500 50,000 13 Administrative building lease 0 0 0 0 0 60,000 60.000 15 Marketing Department: 16 Marketing wages and salaries 55,000 20,000 0 150,000 25,000 250,000 17 Selling expenses 5.000 0 0 35.000 10.000 50.000 19 Total $ 320.000 252.000 5 380.000 S 367.500 S 490.500 1.810.000 20 21 H\Exhibit 7-4 Exhibit 7-5 Exhibit 7-6 / Exhibit 7-8 Exhibit 1 TU Exhibit 7-4 shows that the Customer Orders cost pool consumes 25% of the resources represented by the $500,000 of indirect factory wages. 25% X $500,000 = $125,000 Other entries in the table are computed in a similar fashion. hibit 2 Computation of Activity Rates - 10 ,00 3 Microsoft Excel - ABC model-Classic Brass.XLS OX x Eile Edit View Insert Format Tools Data Window Help File Type a question for help 5 x DA - ! ! 100% Arial BI U DE $ % $ %, * 8.8 EF A B D E F (a) a ( (6) (a) = (b) 1 Activity Cost Pools Total Cost* Total Activity Activity Rate 2 Customer orders $320,000 1.000 orders $320 per order 3 Product design $252,000 400 designs $630 per design 4 Order size $380.000 20.000 MHS $19 per MH 5 Customer relations $367,500 250 customers $1,470 per customer 6 Other $490.500 Not applicable Not applicable 8 From Exhibit 7-5. 9 H\Exhibit 7-4 Exhibit 7-5 Exhibit 7-6 Exhibit 7 * |