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

1)Allocation = allocation cost* %

	Removing asbetors	Estimating and Job Setup	working on non routine job	other
Wages and salaries	223200 [372000*.60]	37200 [372000*.10]	74400 [372000*.20]	37200
Disposal fees	465000	0	310000	0
equipemnt Depreciation	48000	9600	14400	24000
on site fees	40600	11600	5800	0
office supplies	28000	112000	56000	84000
Licensing and insurance	120000	0	288000	72000
Total	924800	170400	748600	217200

2)

	Removing asbetors	Estimating and Job Setup	working on non routine job	other
Total cost	924800	170400	748600	217200
Activity	800	400	100	none
cost per activity	924800/800=$ 1156 per thousand of square feet	170400/400 =$ 426 per job	7486 per non routine job

3)

Part	a	b	c
Total cost	[1156*1000/1000] + [426*1] = 1156+426 =$ 1582	[1156*2000/1000]+[426*1] 2312+426 2738	[1156*2000/1000]+[426*1]+[7486*1] 2312+426+7486 10224
Average cost	1582/1000 = $ 1.582 per thousand square feet	2738/1000 = $ 2.738 per thousand square feet	10224 /1000 = $ 10.224 per thousand square feet