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 $2.80 to determine the bid price. Since our average cost is only $2.585 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	850	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	$	400,000
Disposal fees		791,000
Equipment depreciation		96,000
On-site supplies		60,000
Office expenses		300,000
Licensing and insurance		500,000
Total cost	$	2,147,000

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

Complete this question by entering your answers in the tabs below.

• Req 1

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

	Removing asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total Wages and salaries $0 Disposal fees 0 Equipment depreciation 0 On-site supplies 0 Office expenses 0 Licensing and insurance 0 Total cost $0 $0 $0 $0 $0

Req 2

Compute the activity rates for the activity cost pools.

	Activity Cost Pool Activity Rate Removing asbestos per thousand square feet Estimating and job setup per job Working on nonroutine jobs    per nonroutine job

Req 3A to 3C

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. (Round the "Average Cost per thousand square feet" to 2 decimal places.)

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.

Show less

	Routine 1,000 sq. ft. job Routine 2,000 sq. ft. job Nonroutine 2,000 sq. ft. job Total cost of the job Average Cost per thousand square feet

Answer 1

1.

	Removing	Estimating and	Working on	Other	Total
	Asbestos	Job Setup	Nonroutine Jobs
Wages and salaries	240000	40000	80000	40000	400000
Disposal fees	474600	0	316400	0	791000
Equipment depreciation	38400	4800	24000	28800	96000
On-site supplies	36000	15000	9000	0	60000
Office expenses	30000	105000	75000	90000	300000
Licensing and insurance	150000	0	250000	100000	500000
Total cost	969000	164800	754400	258800	2147000

2.

Activity Cost Pool	Activity Rate $
Removing asbestos	1140	per thousand square feet
Estimating and job setup	412	per job
Working on nonroutine jobs	7544	per nonroutine job

Working:

Activity Cost Pool	Total cost $	Total Activity		Activity Rate $
Removing asbestos	969000	850	thousand square feet	1140	per thousand square feet
Estimating and job setup	164800	400	jobs	412	per job
Working on nonroutine jobs	754400	100	nonroutine jobs	7544	per nonroutine job

3.

	Routine	Routine	Nonroutine
	1,000 sq. ft.	2,000 sq. ft.	2,000 sq. ft.
	job	job	job
Total cost of the job	$                                         1,552	$                                      2,692	$                           10,236
Average Cost per thousand square feet	$                                   1,552.00	$                                1,346.00	$                       5,118.00

Working:

3.a.	Total cost of the job	($1140 + $412) = $1552
	Average cost per thousand square feet	$                                                          1,552
3.b.	Total cost of the job	[(2 x $1140) + $412] = $2692
	Average cost per thousand square feet	($2692/2) = $1346
3.c.	Total cost of the job	[(2 x $1140) + $7544 + $412 = $10236
	Average cost per thousand square feet	($10236/2) = $5118