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 $3.60 to determine the bid price. Since our average cost is only $2.845 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	750	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	$	460,000
Disposal fees		862,000
Equipment depreciation		104,000
On-site supplies		66,000
Office expenses		360,000
Licensing and insurance		560,000
Total cost	$	2,412,000

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	70	%		0	%		30	%		0	%	100	%
Equipment depreciation	50	%		10	%		15	%		25	%	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

a)	First Stage allocation of cost to activity cost pools.
		Removing Asbestos	Estimating Job Setup	Working on non routine Job	Other	Total
	Wages	230,000	69,000	92,000	69,000	460,000
	Disposal fees	603,400	-	258,600	-	862,000
	Equipment Depreciation	52,000	10,400	15,600	26,000	104,000
	Onsite supplies	39,600	19,800	6,600	-	66,000
	Office Expense	54,000	126,000	72,000	108,000	360,000
	Licensing and Insurance	140,000	-	336,000	84,000	560,000
	Total cost	1,119,000	225,200	780,800	287,000	2,412,000
b)	Activity Cost Pool	Activity Cost	Activity for the year	Activity Rate
	Removing Asbestos	1,119,000	750	1492.00	per thousand sq ft
	Estimating Job Setup	225,200	400	563.00	per job
	Working on non routine Job	780,800	100	7808.00	per nonroutine job
c)	Calculate Cost of Job using ABC
	Activity Cost Pool	Activity Rate	Routine Job-a	Cost allocated to Routine Job-a	Routine Job-b	Cost allocated to Routine Job-b	Non Routine Job-c	Cost allocated to Non Routine Job-c
	(thousand Sq. feet)		1,000		2000		2000
	Removing Asbestos	1,492.00	1	1492.00	2	2,984.00	2	2,984.00
	Estimating Job Setup	563.00	1	563.00	1	563.00
	Working on non routine Job	7,808.00					1	7,808.00
	Total cost of Job			2055.00		3547.00		10792.00
	Average cost			2.06		1.77		5.40