Question

Vance Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company’s estimator has been involved in a long-simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between routine work, such as removal of asbestos insulation around heating pipes in older homes, and non-routine work, such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that non-routine 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 metres by $4,700 per thousand square metres to determine the bid price. Since our average cost is only $3,700 per thousand square metres, that leaves enough cushion to take care of the additional costs of non-routine 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 ABC study of all of its costs. Data from the ABC system follow:

Activity Cost Pool	Activity Measure	Total Activity
Removing asbestos	Thousands of square metres	500,000	m2
Estimating and job setup	Number of jobs	260	jobs*
Working on non-routine jobs	Number of non-routine jobs	25	non-routine jobs
Other (costs of idle capacity and organization-sustaining costs)	Not applicable; these costs are not allocated to jobs.

* The total number of jobs includes non-routine jobs as well as routine jobs. Non-routine jobs as well as routine jobs require estimating and setup work.

Wages and salaries	$	270,000
Disposal fees		705,000
Equipment depreciation		101,000
On-site supplies		74,000
Office expenses		246,000
Licensing and insurance		454,000
Total cost	$	1,850,000

	Distribution of Resource Consumption across Activity Cost Pools
	Removing Asbestos			Estimating and Job Setup			Working on Non-routine Jobs			Other			Total
Wages and salaries		45	%		10	%		30	%		15	%		100	%
Disposal fees		70	%		0	%		30	%		0	%		100	%
Equipment depreciation		40	%		0	%		35	%		25	%		100	%
On-site supplies		55	%		15	%		25	%		5	%		100	%
Office expenses		10	%		40	%		35	%		15	%		100	%
Licensing and insurance		50	%		0	%		40	%		10	%		100	%

Required:

1. Perform the first-stage allocation of costs to the activity cost pools. (Do not leave any empty spaces; input a 0 wherever it is required.)

	Removing asbestos	estimating and job set up	working on non-job routines	others	totals
wages and salaries
disposla fees
equipement depreciation
On-site supplies
office expenses
licensing and insurance

2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.)

Acitivity cost pool	Activity rate
Removing abestos	number (per thousand sqaure meters )
estimating and job set up	number (per job)
working on non job routines	number (per non-job routine)

3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square metres of each of the following jobs according to the ABC system:

a. A routine 1,000-square-metre asbestos removal job. (Round your answers to 2 decimal places.)

total costs of jobs

average cost per thousand square meters

b. A routine 2,000-square-metre asbestos removal job. (Round your answers to 2 decimal places.)

total cost of jobs

cost per thousand square meters

c. A non-routine 1,000-square-metre asbestos removal job. (Round your answers to 2 decimal places.)

total cost of jobs

cost per thousand square meters

Answer 1

Solution 1:

First stage allocation of cost to activity cost pools
Particulars	Total Cost	Removing Asbestos		Estimating and Job Setup		Working on non routine job		Others
		%	Amount	%	Amount	%	Amount	%	Amount
Wages & Salaries	$270,000.00	45%	$121,500.00	10%	$27,000.00	30%	$81,000.00	15%	$40,500.00
Disposal Fees	$705,000.00	70%	$493,500.00	0%	$0.00	30%	$211,500.00	0%	$0.00
Equipment depreciation	$101,000.00	40%	$40,400.00	0%	$0.00	35%	$35,350.00	25%	$25,250.00
On Site Supplies	$74,000.00	55%	$40,700.00	15%	$11,100.00	25%	$18,500.00	5%	$3,700.00
Office Expenses	$246,000.00	10%	$24,600.00	40%	$98,400.00	35%	$86,100.00	15%	$36,900.00
Licensing and Insurance	$454,000.00	50%	$227,000.00	0%	$0.00	40%	$181,600.00	10%	$45,400.00
Total	$1,850,000.00		$947,700.00		$136,500.00		$614,050.00		$151,750.00

Solution 2:

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
					Removing Asbestos	$947,700.00	Thousand of Square Feet	500	$1,895.40
Estimating and Job Setup	$136,500.00	Number of Jobs	260	$525.00
Working on non routine job	$614,050.00	Number of non routine jobs	25	$24,562.00
Other	$151,750.00	No allocation
Total	$1,850,000.00

Solution 3a:

Computation of total cost and average cost per thousand square feet - Routine 1000 meter feet job
Particulars	Amount
Removing Asbestos	$1,895.40
Estimating and Job Setup	$525.00
Total cost of job	$2,420.40
Average cost per thousand square feet	$2,420.40

Solution 3b:

Computation of total cost and average cost per thousand square feet - Routine 2000 Square meter job
Particulars	Amount
Removing Asbestos	$3,790.80
Estimating and Job Setup	$525.00
Total cost of job	$4,315.80
Average cost per thousand square feet	$2,157.90

Solution 3c:

Computation of total cost and average cost per thousand square feet - Non routine 1000 Square meter job
Particulars	Amount
Removing Asbestos	$1,895.40
Estimating and Job Setup	$525.00
Working on non routine job	$24,562.00
Total cost of job	$26,982.40
Average cost per thousand square feet	$26,982.40