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 $3.20 to determine the bid price. Since our average cost is only $2.75 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 (organization-sustaining costs and idle capacity 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 $ 470,000 Disposal fees 801,000 Equipment depreciation 110,000 On-site supplies 68,000 Office expenses 370,000 Licensing and insurance 570,000 Total cost $ 2,389,000 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 60 % 25 % 15 % 0 % 100 % Office expenses 10 % 40 % 15 % 35 % 100 % Licensing and insurance 30 % 0 % 50 % 20 % 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) Disribution of Resource consumption across activities

Rem asbestos Estimating&Job setup Non routine Other Total

Wages and 282000(60) 47000(10) 94000(20) 47000(10) 470000

Salaries

Disposalfees 480600(60) - 320400(40) - 801000

Equipmentdep 55000(50) 11000(10) 16500(15) 27500(25)110000

Onsite sup 40800(60) 17000(25) 10200(15) - 68000

Office exp 37000(10) 148000(40) 55500(15) 129500(35)370000

Licensing&ins 171000(30) - 285000(50)114000(20) 570000

Total 1066400 223000 781600 318000 2389000

2) Activity rates for activity cost pools

Removing asbestos 1066400/800=1333 per thousand square feet

Estimating and jobsetup= 223000/500=446 per job

Non routine jobs= 781600/100=7816 per nonroutine job

3) a) Routine 1000sft asbestos removal

Removing asbestos = 1333×1 thousand sft=1333

Est and job setup= 446×1job = 446

Non routine - since it is routine N.A   

Total cost=1779 per thousandsft asbestos removal job

b) Routine 2000 sft asbestos removal job

Rem asbestos= 1333 per thousand sft×2 =2666

Est and job setup=446×1 job setup= 446

No non routine job cost

Total=3112/2=1556 per thousand sft removal of asbestos job

C) Non routine 2000 sft asbestos removal job

Rem asbetsos= 1333 per thousand sft× 2=2666

Est and job setup=446× 1 job= . 466

Non routine job = 7816×1job= 7816

Total =10948

So it is 10948/2=5474 per thousand sft of non routine job