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 $4,800 per thousand square metres to determine the bid price. Since our average cost is only $3,800 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	240	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	$	280,000
Disposal fees		720,000
Equipment depreciation		104,000
On-site supplies		76,000
Office expenses		254,000
Licensing and insurance		466,000
Total cost	$	1,900,000

	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:

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

Answer 1

solution: estimating Other Totals Removing asbestos working on Nonroutine s wages and salaries disposal fees equipment depreciation onsite supplies office expense Licensing and insurance 40% 75% 45% 50% 10% 50% job setup 10% 0% 0% 15% 40% 35% 25% 40% 25% 30% 45% 15% 0% 15% 10% 20% 5% 280000 720000 104000 76000 254000 466000 0% 1)first stage allocations of costs to activity cost pools. Totals 000 wages and salaries** disposal fees equipment depreciation onsite supplies office expense Licensing and insurance total Removing estimating working on Other asbestos & Nonroutine job setup 112000 28000 98000 540000 180000 46800 41600 38000 11400 19000 25400 101600 76200 233000 209700 995200 1410001 624500 42000 280000 0 720000 15600 104000 7600 76000 50800 254000 23300466000 139300 1900000 **First stage allocation = Total cost * percent for example wages in removing asbestos = 280000*40%=112000

2) activity rate activity cost pool Removing asbestos Estimating & job setup working on nonroutine job cost total activity activity rate ba/b 995200 500 1,990.40 per thousand sq ft 141000 240 587.50 per job 624500 25 24,980.00 per non routine job 3c) cost of job Activity Cost Pool (a) (b) Activity Rate Activity 1,990.40 587.50 24,980.00 1 1 1 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 1,990.40 587.50 24,980.00 27,557.90 1.00 27,557.90