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 $2.50 to determine the bid price. Since our average cost is only $2.155 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 1,000 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 Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost 328,000 706,000 90,000 53,000 230,000 430,000 1,837,000 $ Distribution of Resource Consumption Across Activities Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Removing Asbestos 60% 60% 40% 70% 10% 35% Estimating and Job Setup 10% 0% 5% 20% Working on Nonroutine Jobs 20% 40% 20% 10% 25% 50% Other 10% 0% 35% 0% 30% 15% Total 100% 100% 100% 100% 100% 100% 35% 0%

Answer 1

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Mercer Asbestos
Answer 1
Costs	Amount	Removing	Job Setup	Non Routine	Other	Total	Removing	Job Setup	Non Routine	Other	Total
Wages & Salaries	328,000.00	60%	10%	20%	10%	100%	196,800.00	32,800.00	65,600.00	32,800.00	328,000.00
Disposal fees	706,000.00	60%	0%	40%	0%	100%	423,600.00	-	282,400.00	-	706,000.00
Equipment Depreciation	90,000.00	40%	5%	20%	35%	100%	36,000.00	4,500.00	18,000.00	31,500.00	90,000.00
On-site supplies	53,000.00	70%	20%	10%	0%	100%	37,100.00	10,600.00	5,300.00	-	53,000.00
Office Expenses	230,000.00	10%	35%	25%	30%	100%	23,000.00	80,500.00	57,500.00	69,000.00	230,000.00
Licensing and Insurance	430,000.00	35%	0%	50%	15%	100%	150,500.00	-	215,000.00	64,500.00	430,000.00
Total	1,837,000.00						867,000.00	128,400.00	643,800.00	197,800.00	1,837,000.00
Answer 2
Activity cost pool	Activity Measure	Activity costs	Total Activity	Activity rates
Removing asbestos	Thousand of square feet	867,000.00	1,000.00	867.00
Estimating & Job Setup	Number of jobs	128,400.00	400.00	321.00
Non Routine jobs	Number of non routine jobs	643,800.00	100.00	6,438.00
Other	None	197,800.00
Total		1,837,000.00
Answer 3 a
Activity cost pool	Activity Measure	Total Activity	Activity rates	Allocated costs
Removing asbestos	Thousand of square feet	1.00	867.00	867.00
Estimating & Job Setup	Number of jobs	1.00	321.00	321.00
Total cost				1,188.00
Average cost				1,188.00
Average cost is same because job is done on one thousand square feet and activity costs are also calculated on 1000 square feet.
Answer 3 b
Activity cost pool	Activity Measure	Total Activity	Activity rates	Allocated costs
Removing asbestos	Thousand of square feet	2.00	867.00	1,734.00
Estimating & Job Setup	Number of jobs	1.00	321.00	321.00
Total cost				2,055.00
Average cost (Total cost/2)				1,027.50
Job is done on 2000 square feet. Activity Measure is Thousand of square feet. So Total Activity is 2000/1000= 2.
Answer 3 b
Activity cost pool	Activity Measure	Total Activity	Activity rates	Allocated costs
Removing asbestos	Thousand of square feet	2.00	867.00	1,734.00
Non Routine jobs	Number of non routine jobs	1.00	6,438.00	6,438.00
Total cost				8,172.00
Average cost (Total cost/2)				4,086.00
Job is done on 2000 square feet. Activity Measure is Thousand of square feet. So Total Activity is 2000/1000= 2.