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 $2.50 to determine the bid price. Since our average cost is only $2.46 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	1,000	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	$	407,000
Disposal fees		800,000
Equipment depreciation		96,000
On-site supplies		56,000
Office expenses		300,000
Licensing and insurance		490,000
Total cost	$	2,149,000

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	%		25	%		15	%		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.

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

• Working forms part of the answer
• Amounts are in $
• Requirement 1: First stage allocation

	Removing Asbestos %	Amount $	Estimating and Job Setup %	Amount $	Working on Nonroutine Jobs %	Amount $	Other %	Amount $	Total $	%
Wages and salaries	50	203500	10	40700	30	122100	10	40700	407000	100
Disposal fees	70	560000	0	0	30	240000	0	0	800000	100
Equipment depreciation	40	38400	5	4800	20	19200	35	33600	96000	100
On-site supplies	60	33600	25	14000	15	8400	0	0	56000	100
Office expenses	15	45000	35	105000	20	60000	30	90000	300000	100
Licensing and insurance	25	122500	0	0	60	294000	15	73500	490000	100
TOTAL		1003000		164500		743700		237800	2149000

• Requirement 2: Calculation of activity rates

Activity Cost Pool	Cost	Total activity	Activity rates
Removing Asbestos	$1003000	1000	$1003 per 1000 square feet
Estimating and Job Setup	$164500	500	$329 per job
Working on Nonroutine Jobs	$743700	100	$7437 non routine jobs
Other	$237800	NA
Total	$2149000

• Requirement 3

Activity	Removing Asbestos (a)	Removing Asbestos (b)	Removing Asbestos (c )
No. of activity	1000	2000	2000
Activity rate	1003	1003	1003
Total cost	1003000	2006000	2006000
Square feet	1000	2000	2000
Cost per 1000 square feet	$1003	$1003	$1003