Chapter 7: Mead Cleaning Company Graded Homework Assignment Fall 2017 Mead Clean
ID: 2565150 • Letter: C
Question
Chapter 7: Mead Cleaning Company Graded Homework Assignment
Fall 2017
Mead Cleaning Company is a family-owned business operating out of Bozeman, Montana. For its home carpet cleaning services, the company has always charged a flat fee based on one hundred square feet of carpet cleaned. The current fee is $30 per hundred square feet.
The Mead Company home carpet-cleaning fee is a step cost to the customers. For example, the minimum charge for a Mead carpet-cleaning technician to come to a customer’s location is $30. If a customer has 101 to 199 square feet of carpet to clean, the fee is $60 ($30 x 2). The Mead family believes this fee structure provides enough revenue to cover its travel costs and provide a profit.
However, Chris Fenwick, the company’s accountant, is becoming concerned that the company might actually not be covering all costs on jobs for some customers. Chris is particularly concerned about the jobs done for ranchers that require considerable travel time. Recently Chris talked with Lee Mead, the current CEO, and Pat Mead, the home carpet-cleaning service manager, about these concerns and suggested that a simple activity-based costing system be implemented.
After some discussion, Lee and Pat decided on three activity cost pools and their activity measures. This information is presented in Table 1. The “job support” activity pool consists of costs related to receiving calls from potential customers, scheduling jobs, billing, resolving issues, etc.
Table 1
Overhead Activity Cost Pools & Activity Measures
Activity Cost Pool
Activity Measure
Activity for the Year
Cleaning carpets
100 square feet
20,000
blocks of 100 square feet
Travel to/from jobs
Miles driven
60,000
miles
Job support
Number of jobs
2,000
jobs
Other*
None
Not applicable
* Organization-sustaining costs and idle capacity costs
The total cost of operating the home carpet cleaning services for the year is $430,000 as shown in Table 2.
Table 2
Total Home Carpet Cleaning Service Costs
Wages
$150,000
Cleaning supplies
$40,000
Cleaning equipment depreciation
20,000
Vehicle expenses
80,000
Office expenses
60,000
Pat Mead’s salary
80,000
Total Costs
$430,000
After due consideration, Chris, Lee, and Pat decided to include wages in the overhead activity pools because the technicians also talk with customers who have problems or complaints and work on the company vehicles when needed. Additionally, both of the support staff employees are trained to go out on jobs and do so if needed. Pat strongly believes that asking the technicians and support staff to log how they spent their time would not be helpful and probably would not be received well by the employees. Because of this concern, Lee and Pat decided on how the wages cost will be allocated to the four cost pools based on their experience with the company. All other distributions of resource consumption across the activities (cost pools) were based on corporate records.
Upon review of Mead’s processes, Chris, Lee and Pat agreed that the cleaning supplies could be treated as a direct cost. Customers will be billed for the number of bottles of cleaning and stain-removing solution opened at their location.
Resource consumption will be distributed across the activities (cost pools) as shown in Table 3.
Table 3
Distribution of Resource Consumption Across Activities (Cost Pools)
Home Carpet Cleaning
Service Overhead Costs
Cleaning Carpets
Travel to/from Jobs
Job Support
Other
Total
Wages
70%
20%
5%
5%
100%
Cleaning equipment depreciation
70%
0%
0%
30%
100%
Vehicle expenses
0%
55%
0%
45%
100%
Office expenses
0%
0%
40%
60%
100%
Pat Mead’s salary
0%
0%
40%
60%
100%
Requirements:
Using the information presented above, perform the following calculations.
1. Allocate the costs presented in Table 2 to the appropriate activity cost pools (first stage allocation). If a cost is not allocated to a cost pool, enter “0” in the appropriate cell for that cost.
2. Compute the activity rates for each activity cost pool. Round calculations to the nearest cent.
3. Mead Company recently completed a 5 hundred square foot carpet-cleaning job at the Circle H Ranch – a 50-mile one-way trip from the company’s location in Bozeman. Cleaning supplies totaling $23.50 were used on the job. Compute the overhead costs of this job assuming the activity rates listed in the table provided (DO NOT USE THE RATES YOU CALCUALTED IN PART 2) (second stage allocation).
4. Calculate the margin of the Circle H Ranch job using the following:
a. Sales: the current fee of $30 per hundred square feet.
b. Costs: the ABC overhead costs you calculated in Part 3 and any direct costs given in the assignment.
Table 1
Overhead Activity Cost Pools & Activity Measures
Activity Cost Pool
Activity Measure
Activity for the Year
Cleaning carpets
100 square feet
20,000
blocks of 100 square feet
Travel to/from jobs
Miles driven
60,000
miles
Job support
Number of jobs
2,000
jobs
Other*
None
Not applicable
Explanation / Answer
1 ALLOCATION OF COSTS TO THE ACTIVITY POOLS
1 ALLOCATION OF COSTS TO THE ACTIVITY POOLS
Distribution of Resource Consumption Across Activities TOTAL COSTS Cleaning Carpets Travel to Jobs Job Support Other Total Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Wages $150,000 70 105000 20 30000 5 7500 5 7500 100 150000 Cleaning equipment depreciation $20,000 70 14000 0 0 0 0 30 6000 100 20000 Vehicle expenses $80,000 0 0 55 44000 0 0 45 36000 100 80000 Office expenses $60,000 0 0 0 0 40 24000 60 36000 100 60000 Pat Mead's Salary $80,000 0 0 0 0 40 32000 60 48000 100 80000 $390,000 TOTAL $ 119,000 $ 74,000 $ 63,500 $ 133,500 $ 390,000 2 ACTIVITY RATES FOR THE ACTIVITY COST POOLS Activity Cost Pool Activity Measure Activity for the Year Annual Cost Activity Rate Cleaning carpets Square feet cleaned (00s) 20,000 hundred square feet $ 119,000 $5.95 (159000/20000) Travel to jobs Miles driven 60,000 miles $ 74,000 $1.23 (74000/60000) Job support Number of jobs 2,000 jobs $ 63,500 $31.75 (63500/2000) Others $ 133,500 $6.68 (133500/20000) 3 CALCULATION OF COST: Square feet=500 Unit=5(hundred sq ft) Miles=100 (50*2) Cleaning Carpets $29.75 (5*5.95) Travel to jobs $123.00 (100*1.23) Job support $31.75 Cleaning supplies $23.50 Others $15.69 (5*6.68) TOTAL COST $223.69 Activity Cost Pool Activity Rate Cleaning carpets $5.95 per hundred square feet Travel to jobs $1.23 per mile Job support $31.75 per job Cleaning Carpets Travel to Jobs Job Support Other Total Wages 105000 30000 7500 7500 150000 Cleaning equipment depreciation 14000 0 6000 20000 Vehicle expenses 0 44000 0 36000 80000 Office expenses 0 0 24000 36000 60,000 Pat Meads salary 0 0 32000 48000 80000 Total cost 119000 74000 63500 133500 390000 4 Calculation of margin COST OF JOB $223.69 Revenue $150.00 ($30*5) Cost $223.69 Margin ($73.69)