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 $2.60 to determine the bid price. Since our average cost is only $2.35 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	$	402,000
Disposal fees		737,000
Equipment depreciation		104,000
On-site supplies		64,000
Office expenses		330,000
Licensing and insurance		460,000
Total cost	$	2,097,000

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	60	%		0	%		40	%		0	%	100	%
Equipment depreciation	50	%		10	%		15	%		25	%	100	%
On-site supplies	70	%		20	%		10	%		0	%	100	%
Office expenses	10	%		35	%		25	%		30	%	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

STATEMENT SHOWING FIRST STAGE ALLOCATION OF COST TO ACTIVITY POOL
			BASIS OF	Removing asbestos	Job Setup	Non routine	Other	Total
			APPORTION	IN $	IN $	IN $	IN $	IN $
Wages and salaries			50:15:20:15	201,000	60,300	80,400	60,300	402,000
Disposal fees			60:0:40:0	442,200	0	294,800	0	737,000
Equip deprecciation			50:10:15:25	52,000	10,400	15,600	26,000	104,000
Onsite supplies			70:20:10:0	44,800	12,800	6,400	0	64,000
office expenses			10:35:25:30	33,000	115,500	82,500	99,000	330,000
Licencing and insurance			30:0:50:20	138,000	0	230,000	92,000	460000
TOTAL COST OF ACTIVITY				911,000	199,000	709,700	277,300	2,097,000
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Removing asbestos			000 sq. ft	911000	1000	911
Job setup			Job	199000	500	398
Non routine			Non routine jobs	709700	100	7097
Case-a 1000 sq. ft routine job:
Removing asbestos		(911*1)	911
Job setup			398
Non routine job			0
Totalcost			1309
Divide: '000 sq. ft			1
Cost per '000 sq. ft			1309
Case-b 2000 sq. ft routine job
Removing asbestos		(911*2)	1822
Job setup			398
Non routine job			0
Totalcost			2220
Divide: '000 sq. ft			2
Cost per '000 sq. ft			1110
Case-c Non routine 2000 sq. ft
Removing asbestos		(911*2)	1822
Job setup			398
Non routine job			7097
Totalcost			9317
Divide: '000 sq. ft			2
Cost per '000 sq. ft			4658.5