Question

Vance Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company’s estimator has been involved in a long-simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between routine work, such as removal of asbestos insulation around heating pipes in older homes, and non-routine work, such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that non-routine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: “My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square metres by $4,700 per thousand square metres to determine the bid price. Since our average cost is only $3,700 per thousand square metres, that leaves enough cushion to take care of the additional costs of non-routine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tearing things apart.”

To shed light on this controversy, the company initiated an ABC study of all of its costs. Data from the ABC system follow:

Activity Cost Pool	Activity Measure	Total Activity
Removing asbestos	Thousands of square metres	500,000	m2
Estimating and job setup	Number of jobs	210	jobs*
Working on non-routine jobs * The total number of jobs includes non-routine jobs as well as routine jobs. Non-routine jobs as well as routine jobs require estimating and setup work.      Wages and salaries $ 270,000   Disposal fees 705,000   Equipment depreciation 101,000   On-site supplies 74,000   Office expenses 246,000   Licensing and insurance 454,000      Total cost $ 1,850,000	Number of non-routine jobs	26	non-routine jobs
Other (costs of idle capacity and organization-sustaining costs)	Not applicable; these costs are not allocated to jobs.

	Distribution of Resource Consumption across Activity Cost Pools
	Removing Asbestos			Estimating and Job Setup			Working on Non-routine Jobs			Other			Total
Wages and salaries		40	%		10	%		35	%		15	%		100	%
Disposal fees		75	%		0	%		25	%		0	%		100	%
Equipment depreciation		45	%		0	%		40	%		15	%		100	%
On-site supplies		50	%		15	%		25	%		10	%		100	%
Office expenses		10	%		40	%		30	%		20	%		100	%
Licensing and insurance		50	%		0	%		45	%		5	%		100	%
1. Perform the first-stage allocation of costs to the activity cost pools. (Do not leave any empty spaces; input a 0 wherever it is required.) 2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.) 3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square metres of each of the following jobs according to the ABC system: a. A routine 2,000-square-metre asbestos removal job. (Round your answers to 2 decimal places.) b. A routine 4,000-square-metre asbestos removal job. (Round your answers to 2 decimal places.) c. A non-routine 2,000-square-metre asbestos removal job. (Round your answers to 2 decimal places.)

Answer 1

Answer:

1. Perform the first-stage allocation of costs to the activity cost pools.

	Removing Asbestos	Estimating and Job set up	Working on Nonroutine	Other	Total
Wages and salaries	108000	27000	94500	40500	270000
Disposal fees	528750	0	176250	0	705000
Equipment depreciation	45450	0	40400	15150	101000
On-site supplies	37000	11100	18500	7400	74000
Office expenses	24600	98400	73800	49200	246000
Licensing and insurance	227000	0	204300	22700	454000
Total Cost	970800	136500	607750	134950	1850000

Working notes for the above answer is as under

2. Compute the activity rates for the activity cost pools.

Activity Cost Pools	Total Cost	Total Activity	Activity rate
Removing Asbestos	970800	500,000	1.9416
Estimating and Job set up	136500	210	650
Working on Nonroutine	607750	26	23375

Activity Cost Pools	Activity rate
Removing Asbestos	1.9416	Per square feet
Estimating and Job set up	650	Per job
Working on Nonroutine	23375	Per Nonroutine job

3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square meters of each of the following jobs according to the ABC system:

a. A routine 2,000-square-metre asbestos removal job.

Activity Cost Pools
Removing Asbestos (1.9416x2000)	3883.2
Estimating and Job set up	650
Working on Nonroutine	0
Total cost of job	4533.2
Cost per thousand square feet (4533.2/2)	2266.6

Total cost of job	4533.2
Cost per thousand square feet (4533.2/2)	2266.6

b. A routine 4,000-square-metre asbestos removal job.

Activity Cost Pools
Removing Asbestos (1.9416x4000)	7766.4
Estimating and Job set up	650
Working on Nonroutine	0
Total cost of job	8416.4
Cost per thousand square feet (8416.4/4)	2104.1

Total cost of job	8416.4
Cost per thousand square feet (8416.4/4)	2104.1

c. A non-routine 2,000-square-metre asbestos removal job

Activity Cost Pools
Removing Asbestos (1.9416x2000)	3883.2
Estimating and Job set up	650
Working on Nonroutine	23375
Total cost of job	27908.2
Cost per thousand square feet (27908.2/2)	13954.1

Total cost of job	27908.2
Cost per thousand square feet (27908.2/2)	13954.1