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 $2.745 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. Perform the first-stage allocation of costs to the activity cost pools.
		Total Cost xDistribution of Resource Consumption Across Activities
	Total Cost	RemovingAsbestos		Estimating and Job Setup		Working on Nonroutine jobs		Other
		%	Amount	%	Amount	%	Amount	%	Amount	Total
Wages and salaries	$470,000	60	$282,000	10	$47,000	20	$94,000	10	$47,000	$470,000
Disposal fees	$801,000	60	$480,600	0	$0	40	$320,400	0	$0	$801,000
Equipment depreciation	$110,000	50	$55,000	10	$11,000	15	$16,500	25	$27,500	$110,000
On-site supplies	$68,000	60	$40,800	25	$17,000	15	$10,200	0	$0	$68,000
Office expenses	$370,000	10	$37,000	40	$148,000	15	$55,500	35	$129,500	$370,000
Licensing and insurance	$570,000	30	$171,000	0	$0	50	$285,000	20	$114,000	$570,000
Total Cost	$2,389,000		$1,066,400		$223,000		$781,600		$318,000	$2,389,000

2. Compute the activity rates for the activity cost pools.
Activity Cost pool	Total cost		Total Activity	Activity Rate = Total Cost /Total activity
Removing asbestos	$1,066,400		800	$1,333	per thousand square feet
Estimating and job set up	$223,000		500	$446	per job
Working on nonroutine job	$781,600		100	$7,816	per nonroutine job

Total Cost and Average cost per thousand Square feet routine 1000 Square feet Abestors removal Job
Description	Amount
Removing asbestos ($1333 per Thousand)	$1,333
Estimating and job set up ($446 per Job)	$446
Working on nonroutine job	$0
Total Cost of the Job	$1,779
Average Cost per Thousand Sq Feet ($1779/1)	$1,779

Total Cost and Average cost per thousand Square feet routine 2000 Square feet Abestors removal Job
Description	Amount
Removing asbestos ($1333 X2 per Thousand)	$2,666
Estimating and job set up ($446 per Job)	$446
Working on nonroutine job	$0
Total Cost of the Job	$3,112
Average Cost per Thousand Sq Feet ($3112/2)	$1,556