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 $2.50 to determine the bid price. Since our average cost is only $2.46 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	1,000	thousand square  feet
Estimating and job setup	Number of jobs	500	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 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup.

Costs for the Year
Wages and salaries	$	407,000
Disposal fees		800,000
Equipment depreciation		96,000
On-site supplies		56,000
Office expenses		300,000
Licensing and insurance		490,000
Total cost	$	2,149,000

Distribution of Resource Consumption Across Activities

	Removing Asbestos		Estimating and Job Setup		Working on Nonroutine Jobs		Other		Total
Wages and salaries	50	%	10	%	30	%	10	%	100	%
Disposal fees	70	%	0	%	30	%	0	%	100	%
Equipment depreciation	40	%	5	%	20	%	35	%	100	%
On-site supplies	60	%	25	%	15	%	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

Solution:

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

First Stage Allocation of Costs to the activity cost pools
	Removing Asbestos	Estimating and Job Setup	Working on Non routine Jobs	Other	Total
Wages and salaries	$203,500	$40,700	$122,100	$40,700	$407,000
Disposal fees	$560,000	$0	$240,000	$0	$800,000
Equipment depreciation	$38,400	$48,000	$19,200	$33,600	$96,000
On site supplies	$33,600	$14,000	$8,400	$0	$56,000
Office expenses	$45,000	$105,000	$60,000	$90,000	$300,000
Licensing and insurance	$122,500	$0	$294,000	$73,500	$490,000
Total costs	$1,003,000	$207,700	$743,700	$237,800	$2,149,000

Part 2 - the activity rates for the activity cost pools

Activity cost pools	Overhead Costs (A)	Activity for the year (B)	Activity Rate (A / B)
Removing Asbestos	$1,003,000	1,000	thousand square feet	$1,003.00	Per thousand square feet
Estimating and Job Setup	$207,700	500	Jobs	$415.40	Per Job
Working on Non routine Jobs	$743,700	100	Non routine jobs	$7,437.00	Per Non routine jobs
	$1,954,400

Part 3 –

Total cost and the average cost per thousand square feet of each of the following jobs according to the activity-based costing system

	Routine 1,000 sq. ft. job	Routine 2,000 sq. ft. job	Nonroutine 2,000 sq. ft. job
Allocated Cost for Removing Asbestos	$1,003.00	$2,006.00 (2*1,003)	$0.00
Allocated Cost for Estimating and Job Setup	$415.40	$415.40	$415.40
Allocated cost for non routine jobs	$0.00	$0.00	$7,437.00
Total cost of the job	$1,418.40	$2,421.40	$7,852.40
Average Cost per thousand square feet	$1,418.40	$1,210.70	$3,926.20

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