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 $5,000 per thousand square metres to determine the bid price. Since our average cost is only $4,000 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	250	jobs*
Working on non-routine jobs	Number of non-routine jobs	28	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	$	300,000
Disposal fees		750,000
Equipment depreciation		110,000
On-site supplies		80,000
Office expenses		270,000
Licensing and insurance		490,000
Total cost	$	2,000,000

	Distribution of Resource Consumption across Activity Cost Pools
	Removing Asbestos			Estimating and Job Setup			Working on Non-routine Jobs			Other			Total
Wages and salaries		40	%		10	%		35	%		15	%		100	%
Disposal fees		75	%		0	%		25	%		0	%		100	%
Equipment depreciation		45	%		0	%		40	%		15	%		100	%
On-site supplies		50	%		15	%		25	%		10	%		100	%
Office expenses		10	%		40	%		30	%		20	%		100	%
Licensing and insurance		50	%		0	%		45	%		5	%		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.)

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

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

b. A routine 4,000-square-metre asbestos removal job. (Round your answers to 2 decimal places.)

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

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	$300,000.00	40%	$120,000.00	10%	$30,000.00	35%	$105,000.00	15%	$45,000.00
Disposal Fees	$750,000.00	75%	$562,500.00	0%	$0.00	25%	$187,500.00	0%	$0.00
Equipment depreciation	$110,000.00	45%	$49,500.00	0%	$0.00	40%	$44,000.00	15%	$16,500.00
On Site Supplies	$80,000.00	50%	$40,000.00	15%	$12,000.00	25%	$20,000.00	10%	$8,000.00
Office Expenses	$270,000.00	10%	$27,000.00	40%	$108,000.00	30%	$81,000.00	20%	$54,000.00
Licensing and Insurance	$490,000.00	50%	$245,000.00	0%	$0.00	45%	$220,500.00	5%	$24,500.00
Total	$2,000,000.00		$1,044,000.00		$150,000.00		$658,000.00		$148,000.00

Solution 2:

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
					Removing Asbestos	$1,044,000.00	Thousand of Square meter	500	$2,088.00
Estimating and Job Setup	$150,000.00	Number of Jobs	250	$600.00
Working on non routine job	$658,000.00	Number of non routine jobs	28	$23,500.00
Other	$148,000.00	No allocation
Total	$2,000,000.00

Solution 3a:

Computation of total cost and average cost per thousand square meter - Routine 2000 Square meter job
Particulars	Amount
Removing Asbestos	$4,176.00
Estimating and Job Setup	$600.00
Total cost of job	$4,776.00
Average cost per thousand square meter	$2,388.00

solution 3b:

Computation of total cost and average cost per thousand square meter - Routine 4000 Square meter job
Particulars	Amount
Removing Asbestos	$8,352.00
Estimating and Job Setup	$600.00
Total cost of job	$8,952.00
Average cost per thousand square meter	$2,238.00

Solution 3c:

Computation of total cost and average cost per thousand square meter - Non routine 2000 Square meter job
Particulars	Amount
Removing Asbestos	$4,176.00
Estimating and Job Setup	$600.00
Working on non routine job	$23,500.00
Total cost of job	$28,276.00
Average cost per thousand square meter	$14,138.00