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 $2.85 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 (costs of idle capacity and      organization-sustaining 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. (Round the "Average cost" 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.

         

Answer 1

1Perform 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	230000	69000	92000	69000	460000
Disposal fees	603400	0	258600	0	862000
Equipment depreciation	52000	10400	15600	26000	104000
On-site supplies	39600	19800	6600	0	66000
Office expenses	54000	126000	72000	108000	360000
Licensing and insurance	140000	0	336000	84000	560000
Total	1119000	225200	780800	287000	2412000

2

Compute the activity rates for the activity cost pools.

	Total Cost	Total Activity	Activity Rate
Removing Asbestos	1119000	750	1492	Per thousand square feet
Estimating and Job Setup	225200	400	563	Per jobs
Working on Nonroutine Jobs	780800	100	7808	Per nonroutine jobs

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

	Activity Rate	QTY Per 1000
Removing Asbestos	1492	1	1492
Estimating and Job Setup	563	1	563
		Total	2055

b

	Activity Rate	QTY Per 1000
Removing Asbestos	1492	2	2984
Estimating and Job Setup	563	1	563
		Total	3547

c

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

Activity Rate	QTY Per 1000
Removing Asbestos	1492	1	1492
Estimating and Job Setup	563	1	563
Working on Nonroutine Jobs	7808	1	7808
		Total	9863