Question

In: Accounting

Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has...

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 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 $ 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.

Solutions

Expert Solution

Solution:

Part 1 --- Perform 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

$230,000

$69,000

$92,000

$69,000

$460,000

Disposal fees

$603,400

$0

$258,600

$0

$862,000

Equipment depreciation

$52,000

$10,400

$15,600

$26,000

$104,000

On-site supplies

$39,600

$19,800

$6,600

$0

$66,000

Office expenses

$54,000

$126,000

$72,000

$108,000

$360,000

Licensing and insurance

$140,000

$0

$336,000

$84,000

$560,000

Total Cost

$1,119,000

$225,200

$780,800

$287,000

$2,412,000

Part 2 --- Activity rates for the activity cost pools

Activity Cost pools

Overhead Costs (A)

Total Activity (B)

Activity Rate

(A / B)

Charges for Removing Asbestos

$1,119,000

750

thousand square feet

$1,492

per thousand squarefeet

Estimating and job setup

$225,200

400

jobs

$563

per job

Working on Nonroutine Job

$780,800

100

nonroutine jobs

$7,808

per nonroutine job

Other

$287,000

Non

Total

$2,412,000

Part 3 –

Routine

Routine

Nonroutine

1000 Sq.ft. Job

2,000 Sq.ft. Job

2,000 Sq.ft. Job

Charges for Removing Asbestos

$1,492

$2,984

$2,984

Estimating and job setup

$563

$563

$563

Working on Nonroutine Job

$7,808

Total Cost of the Job

$2,055

$3,547

$11,355

Average Cost per thousand square feet

$2.06

$1.77

$5.68

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you


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