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 $2.455 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 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 $ 407,000 800,000 96,000 56,000 300,000 490,000 $ 2,149,000 Distribution of Resource Consumption Across Activities Estimating Removing and Job Asbestos Setup Wages and salaries 50% 10% Disposal fees 70% Equipment depreciation 40% On-site supplies 60% 25% Office expenses 15% Licensing and insurance Working on Nonroutine Jobs 30% 30% 20% 5% Other 10% % 35% 0% 30% 15% Total 100% 100% 100% 100% 100% 100% 15% in 20% 25% 60%

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	$407,000.00	50%	$203,500.00	10%	$40,700.00	30%	$122,100.00	10%	$40,700.00
Disposal Fees	$800,000.00	70%	$560,000.00	0%	$0.00	30%	$240,000.00	0%	$0.00
Equipment depreciation	$96,000.00	40%	$38,400.00	5%	$4,800.00	20%	$19,200.00	35%	$33,600.00
On Site Supplies	$56,000.00	60%	$33,600.00	25%	$14,000.00	15%	$8,400.00	0%	$0.00
Office Expenses	$300,000.00	15%	$45,000.00	35%	$105,000.00	20%	$60,000.00	30%	$90,000.00
Licensing and Insurance	$490,000.00	25%	$122,500.00	0%	$0.00	60%	$294,000.00	15%	$73,500.00
Total	$2,149,000.00		$1,003,000.00		$164,500.00		$743,700.00		$237,800.00

Solution 2:

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
					Removing Asbestos	$1,003,000.00	Thousand of Square Feet	1000	$1,003.00
Estimating and Job Setup	$164,500.00	Number of Jobs	500	$329.00
Working on non routine job	$743,700.00	Number of non routine jobs	100	$7,437.00
Other	$237,800.00	No allocation
Total	$2,149,000.00

Solution 3a:

Computation of total cost and average cost per thousand square feet - Routine 1000 Square feet job
Particulars	Amount
Removing Asbestos	$1,003.00
Estimating and Job Setup	$329.00
Total cost of job	$1,332.00
Average cost per thousand square feet	$1,332.00

Solution 3b:

Computation of total cost and average cost per thousand square feet - Routine 2000 Square Foot job
Particulars	Amount
Removing Asbestos	$2,006.00
Estimating and Job Setup	$329.00
Total cost of job	$2,335.00
Average cost per thousand square feet	$1,167.50

Solution 3c:

Computation of total cost and average cost per thousand square feet - Non routine 2000 Square foot job
Particulars	Amount
Removing Asbestos	$2,006.00
Estimating and Job Setup	$329.00
Working on non routine job	$7,437.00
Total cost of job	$9,772.00
Average cost per thousand square feet	$4,886.00