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 $2.01 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 squarefeet
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	$	308,000
Disposal fees		706,000
Equipment depreciation		90,000
On-site supplies		50,000
Office expenses		210,000
Licensing and insurance		410,000
Total cost	$	1,774,000

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		70	%			0	%			30	%			0	%				100	%
Equipment depreciation		40	%			5	%			25	%			30	%				100	%
On-site supplies		70	%			20	%			10	%			0	%				100	%
Office expenses		15	%			35	%			20	%			30	%				100	%
Licensing and insurance		25	%			0	%			50	%			25	%				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

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	184800	30800	61600	30800	308000
Disposal fees			70:0:30:0	494200	0	211800	0	706000
Equipment depreciation			40:5:25:30	36000	4500	22500	27000	90000
Onsite supplies			70:20:10:0	35,000	10,000	5,000	0	50,000
office expense			15:35:20:30	31,500	73,500	42,000	63,000	210,000
Licencing and insurance			25:0:50:25	102,500	0	205,000	102,500	410,000
TOTAL COST OF ACTIVITY				884,000	118,800	547,900	223,300	1,774,000
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Removing asbestos			000 sq. ft	884,000	850	1,040
Job setup			Jobs	118,800	400	297
Non routine jobs			Non routine jobs	547,900	100	5,479
Req 3.
Casea: aroutine 1000 sq. ft job:
Removing assbestos (1*1040)			1040
Job setup (1*297)			297
Total cost			1337
Divide: Number of 000 sq. ft			1
Cost per 000 sq. ft			1337
Case b: A Routine 2000 sq. ft job
Removing assbestos (2*1040)			2080
Job setup (1*297)			297
Total cost			2377
Divide: Number of 000 sq. ft			2
Cost per 000 sq. ft			1188.5
Casec : Anon routine 2000 asbestos
Removing assbestos (2*1040)			2080
Job setup (1*297)			297
Non routine job (1*5479)			5479
Total cost			7856
Divide: Number of 000 sq. ft			2
Cost per 000 sq. ft			3928