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 $2.31 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	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	$	360,000
Disposal fees		765,000
Equipment depreciation		98,000
On-site supplies		57,000
Office expenses		270,000
Licensing and insurance		470,000
Total cost	$	2,020,000

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	%	30	%	10	%	0	%	100	%
Office expenses	15	%	35	%	20	%	30	%	100	%
Licensing and insurance	30	%	0	%	50	%	20	%	100	%

Required:

   

1.	Perform the first-stage allocation of costs to the activity cost pools.
	Removing Estimating and Working on Asbestos Job Setup Nonroutine Jobs Other Total Wages and salaries $0 Disposal fees 0 Equipment depreciation 0 On-site supplies 0 Office expenses 0 Licensing and insurance 0 Total cost $0 $0 $0 $0 $0

        

2.	Compute the activity rates for the activity cost pools.
	Activity Cost Pool Activity Rate Removing asbestos per thousand square feet Estimating and job setup per job Working on nonroutine jobs per nonroutine job

       

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.
		Total cost of the job Average cost per thousand square feet

          

b.	A routine 2,000-square-foot asbestos removal job.
	Total cost of the job Average cost per thousand square feet

          

c.	A nonroutine 2,000-square-foot asbestos removal job.
	Total cost of the job Average cost per thousand square feet

          

Answer 1

1
MERCER ASBESTOS REMOVAL COMPANY
First Stage Allocation
	Removing Asbestos	Estimating and Job Setup	Working on Nonroutine Hobs	Other	Totals
Wages and salaries (360000 x 50%/10%/30%/10%)	$         180,000	$           36,000	$        108,000	$           36,000	$        360,000
Disposal fees (765000 x 70%/0%/30%/0%)	535,500	0	229,500	0	765,000
Equipment depreciation (98000 x 40%/5%/20%/35%)	39,200	4,900	19,600	34,300	98,000
On-site supplies (57000 x 60%/30%/10%/0%)	34,200	17,100	5,700	0	57,000
Office expenses (270000 x 15%/35%/20%/30%)	40,500	94,500	54,000	81,000	270,000
Licensing and insurance (470000 x30%/0%/50%/20%)	141,000	-	235,000	94,000	470,000
Total cost	$         970,400	$         152,500	$        651,800	$         245,300	$     2,020,000
2.
MERCER ASBESTOS REMOVAL COMPANY
Activity Rates for Activity Cost Pools
Activity Cost Pool	Total Cost	Total Activity	Activity Rate
Removing Asbestos as calculated above	$         970,400	800	$       1,213.00	per thousand square feet		(970400/800)
Estimating and job setup as calculated above	$         152,500	500	$          305.00	per job		(152500/500)
Working on nonroutine jobs as calculated above	$         651,800	100	$       6,518.00	per nonroutine job		(651800/100)
3.
MERCER ASBESTOS REMOVAL COMPANY
Total and Average Cost per Thousand Square Feet
a. Routine job - square feet	1,000
Removing asbestos	1213	(1213 x 1)
Estimating and job set-up	305	(305 x 1)
Nonroutine job	-
Total cost of the job	1518	(1213+305)
Cost per thousand square feet	1518	(1518/1)
b. Routine job - square feet	2,000
Removing asbestos	2426	(1213 x 2)
Estimating and job set-up	305	(305 x 1)
Nonroutine job	-
Total cost of the job	2731	(2426+305)
Average cost per thousand square feet	1365.5	(2731/2)
c. Nonroutine job - square feet	2,000
Removing asbestos	2426	(1213 x 2)
Estimating and job set-up	305	(305 x 1)
Nonroutine job	6,518	(6518 X 1)
Total cost of the job	9249	(2426+305+6518)
Average cost per thousand square feet	4624.5	(9249/2)