Question

Mercer Asbestos Removal Company removes potentially toxic asbestos Insulation and related products from bulldings. 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 celling plaster in industrial buildings. The on-site supervision 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 $3.00 to determine the bid price. Since our average cost is only $2.675 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 Disposal fees Equipment depreciation On-site supplies office expenses Licensing and insurance Total cost 423,000 802,000 96,000 62,000 320,000 510,000 $ 2,213,000

Answer 1

solution: estimating Other Totals Removing asbestos working on Nonroutine wages and salaries disposal fees equipment depreciation onsite supplies office expense Licensing and insurance 50% 70% 50% 60% 10% 25% job setup 10% 0% 10% 30% 35% 0% 30% 30% 15% 10% 25% 60% 10% 0% 25% 0% 30% 15% 423000 802000 96000 62000 320000 510000 1)first stage allocations of costs to activity cost pools. Totals wages and salaries** disposal fees equipment depreciation onsite supplies office expense Licensing and insurance total Removing estimating working on Other asbestos Nonroutine job setup 2115001 42300 126900 5614001 ol 240600 48000 9600 14400 37200 18600 6200 32000 112000 80000 127500 306000 1017600 1825001 774100 42300 423000 0802000 24000 96000 062000 96000 320000 76500 510000 238800 2213000 **First stage allocation = Total cost * percent for example wages in removing as bestos = 423000*50%=211500

2) activity rate activity cost pool total activity a Removing asbestos Estimating & job setup working on nonroutine job cost b 1017600 182500 774100 800 500 100 activity rate a/b 1,272.00 per thousand sq ft 365.00 per job 7,741.00 per non routine job! 3a) cost of job Activity Cost Pool a ) (b) Activity Rate Activity 1,272.00 365.00 (a) (b) ABC Cost 1 1,272.00 1 365.00 Removing asbestos Estimating & job setup working on nonroutine job (Not applicable) Total cost of job / No of sq ft in thousand cost per thousand sq ft 1,637.00 1.00 1,637.00 3b) cost of job Activity Cost Pool (a) (b) Activity Rate Activity 1,272.00 365.00 (a) (b) ABC Cost 2 2,544.00 1 365.00 Removing asbestos Estimating & job setup working on nonroutine job (Not applicable) Total cost of job / No of sq ft in thousand cost per thousand sq ft 2,909.00 2.00 1,454.50 3c) cost of job Activity Cost Pool (a) (b) Activity Rate Activity 1,272.00 365.00 7,741.00 Removing asbestos Estimating & job setup working on nonroutine job Total cost of job / No of sq ft in thousand cost per thousand sq ft (a) (b) ABC Cost 2 2,544.00 1 365.00 7,741.00 10,650.00 2.00 5,325.00