Question

Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the company’s estimator and the work supervisors. The on-site supervisors claim that the estimators do not adequately distinguish between routine work, such as removal of asbestos insulation around heating pipes in older homes, and nonroutine work, such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that nonroutine 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 footage by $3.00 to determine the bid price. Since our average cost is only $2.755 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine 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 activity-based costing study of all of its costs. Data from the activity-based costing system follow:

Activity Cost Pool	Activity Measure	Total Activity
Removing asbestos	Thousands of square feet	800	thousand square feet
Estimating and job setup	Number of jobs	400	jobs
Working on nonroutine jobs	Number of nonroutine jobs	100	nonroutine jobs
Other (organization-sustaining costs and idle capacity costs)	None
Note: The 100 nonroutine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.

Costs for the Year
Wages and salaries	$	420,000
Disposal fees		814,000
Equipment depreciation		96,000
On-site supplies		62,000
Office expenses		320,000
Licensing and insurance		520,000
Total cost	$	2,232,000

Distribution of Resource Consumption Across Activities
	Removing Asbestos			Estimating and Job Setup			Working on Nonroutine Jobs			Other		Total
Wages and salaries	50	%		15	%		20	%		15	%	100	%
Disposal fees	60	%		0	%		40	%		0	%	100	%
Equipment depreciation	40	%		5	%		20	%		35	%	100	%
On-site supplies	60	%		30	%		10	%		0	%	100	%
Office expenses	15	%		35	%		20	%		30	%	100	%
Licensing and insurance	25	%		0	%		60	%		15	%	100	%

Required:

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

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

3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square feet of each of the following jobs according to the activity-based costing system.

a. A routine 1,000-square-foot asbestos removal job.

b. A routine 2,000-square-foot asbestos removal job.

c. A nonroutine 2,000-square-foot asbestos removal job.

Answer 1

STATEMENT SHOWING FIRST STAGE ALLOCATION OF COST TO ACTIVITY POOL
			BASIS OF	Removing	Job setups	Non routine Jobs	Others	Total
			APPORTION	Asbestos	IN $	IN $	IN $	IN $
Wages and salaries			50:15:20;15	210,000	63,000	84,000	63,000	420,000
Disposal fees			60:0:40:0	488,400	0	325,600	0	814,000
Equipment dep			40:5:20:35	38,400	4,800	19,200	33,600	96,000
On site supplies			60:30:10:0	37,200	18,600	6,200	0	62,000
office expense			15:35:20:30	48,000	112,000	64,000	96,000	320,000
Licencing and insurance			25:0:60:15	130,000	0	312,000	78,000	520000
TOTAL COST OF ACTIVITY				952,000	198,400	811,000	270,600	2,232,000
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Removing asbestos			000 sq. ft	952,000	800	1,190
Job setup			Jobs	198,400	400	496
Non routine jobs			Non routine jobs	811,000	100	8,110
Cost:
Case-a Routine 1000 sq, ft:
Removing asbestos (1*1190)			1190
Job setup (1*496)			496
Totalcost			1686
Divide; Units			1
Cost per 000 sq. ft			1686
Case b: Routine 2000 sq. ft
Removing asbestos (2*1190)			2380
Job setup (1*496)			496
Totalcost			2876
Divide; Units			2
Cost per 000 sq. ft			1438
Case c Non routine 2000 sq. ft
Removing asbestos (2*1190)			2380
Job setup (1*496)			496
Non routine Jobs (1*8110)			8110
Totalcost			10986
Divide; Units			2
Cost per 000 sq. ft			5493