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 $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.

Answer 1

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

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