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Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has...

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 $4.20 to determine the bid price. Since our average cost is only $2.90 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 500 thousand square feet
Estimating and job setup Number of jobs 400 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 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.
Costs for the Year
Wages and salaries $ 431,000
Disposal fees 713,000
Equipment depreciation 104,000
On-site supplies 63,000
Office expenses 330,000
Licensing and insurance 530,000
Total cost $ 2,171,000
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 70 % 20 % 10 % 0 % 100 %
Office expenses 10 % 35 % 25 % 30 % 100 %
Licensing and insurance 20 % 0 % 50 % 30 % 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.

Solutions

Expert Solution

STATEMENT SHOWING FIRST STAGE ALLOCATION OF COST TO ACTIVITY POOL
BASIS OF Removing Job setup Non routine Other Total
APPORTION asbestos IN $ IN $ IN $ IN $
Wages and salaries 60:10:20:10 258,600 43,100 86,200 43,100 431,000
Disposal fees 60:0:40:0 427,800 0 285,200 0 713,000
Equip dep 50:10:15:25 52,000 10,400 15,600 26,000 104,000
On site supplies 70:20:10:0 44,100 12,600 6,300 0 63,000
office expensee 10:35:25:30 33,000 115,500 82,500 99,000 330,000
Licencing and insurance 20:0:50:30 106,000 0 265,000 159,000 530000
TOTAL COST OF ACTIVITY 921,500 181,600 740,800 327,100 2,171,000
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
Activity Total Expected Activity
ACTIVITY COST POOL Measures Overheads Activity Rate
Removing asbestos 000 sq. ft 921,500 500 1,843
Job setup Job 181,600 400 454
Non routine cost Non routine jobs 740,800 100 7,408
Req 3.
a. routine 1000 sq. ft.
Removal asbestos (1*1843) 1843
Job setup 454
Total cost 2297
Divide: Number of 000 sq. ft 1
Cost per 000 sq. ft 2297
b. A routine 2000 sq. ft
Removal asbestos (2*1843) 3686
Job setup 454
Total cost 4140
Divide: Number of 000 sq. ft 2
Cost per 000 sq. ft 2070
c. A non routine 2000 sq. ft
Removal asbestos (1*1843) 1843
Job setup 454
Non routine cost 7408
Total cost 9705
Divide: Number of 000 sq. ft 2
Cost per 000 sq. ft 4852.5

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