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 $2.575 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	$	372,000
Disposal fees		775,000
Equipment depreciation		96,000
On-site supplies		58,000
Office expenses		280,000
Licensing and insurance		480,000
Total cost	$	2,061,000

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	50	%		10	%		15	%		25	%	100	%
On-site supplies	70	%		20	%		10	%		0	%	100	%
Office expenses	10	%		40	%		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 setup	Non routine	Others	Total
			APPORTION	Asbestos	IN $	IN $	IN $	IN $
Wages and salaries			60:10:20:10	223,200	37,200	74,400	37,200	372,000
Disposal fes			60:0:40:0	465,000	0	310,000	0	775,000
Equip dep			50:10:15:25	48,000	9,600	14,400	24,000	96,000
On site supplies			70:20:10:0.	40,600	11,600	5,800	0	58,000
Office expenses			10:40:20:30	28,000	112,000	56,000	84,000	280,000
Licencing and insurance			25:0:60:15	120,000	0	288,000	72,000	480000
TOTAL COST OF ACTIVITY				924,800	170,400	748,600	217,200	2,061,000
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Removin asbestos			000 s. ft	924,800	800	1,156
Job setip			Jobs	170,400	400	426
Non routine work			Non routine	748,600	100	7,486
Req 3-a
A routine 1000 sq. ft asbestos:
Removing asbestos (1*1156)			1156
Job setup			426
Total cost			1582
Divide: 000 sq. ft			1
Cost per 000 sq. ft			1582
Req 3-b:
A routine 2000 sq asbestos
Removing asbestos (2*1156)			2312
Job setup			426
Total cost			2738
Divide: 000 sq. ft			2
Cost per 000 sq. ft			1369
Req 3-c
A Non routine 2000 sq asbestos
Removing asbestos (2*1156)			2312
Job setup			426
Non routine job			7486
Total cost			10224
Divide: 000 sq. ft			2
Cost per 000 sq. ft			5112