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 $3.20 to determine the bid price. Since our average cost is only $2.805 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	850	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.

Disposal fees		824,000
Equipment depreciation		108,000
On-site supplies		64,000
Office expenses		340,000
Licensing and insurance		540,000
Total cost	$	2,316,000

Wages and salaries Disposal fees Equipment depreciatiorn On-site supplies office expenses Licensing and insurance Total cost $ 440 000 824,000 108,000 64,000 340,000 540,000 $ 2,316,000 Distribution of Resource Consumption Across Activities Estimating Working on Removing and Job Nonroutine Asbestos 50% 70% 40% 608 15% 30% Setup 108 08 58 30% 35% 08 Jobs 308 30% 20% 10% 20% 608 Other Total 1008 1008 1008 1008 1008 100% 108 0% 35% Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance 30% 108 Required: 1. Perform the first-stage allocation of costs to the activity cost pools. 2. Compute the activity rates for the activity cost pools. 3. Using the activity rates you have computed. determine the total cost and the average cost per tho following jobs according to the activity-based costing system. a. A routine 1.000-square-foot asbestos removal job. b. A routine 2,000-square-foot asbestos removal job. c. A nonroutine 2.000-square-foot asbestos removal job. & Answer is complete but not entirely correct.

Required:

1. Perform the first-stage allocation of costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools.

3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square feet of each of the following jobs according to the activity-based costing system.

a. A routine 1,000-square-foot asbestos removal job.

b. A routine 2,000-square-foot asbestos removal job.

c. A nonroutine 2,000-square-foot asbestos removal job.

Answer 1

Answer:

1

First stage allocation of cost to activity cost pools
Particulars	Removing Asbestos	Estimating and Job Setup	Working on non routine job	Others	Total Cost
	Amount	Amount	Amount	Amount
Wages & Salaries	220000	44000	132000	44000	440000
Disposal Fees	576800	0	247200	0	824000
Equipment depreciation	43200	5400	21600	37800	108000
On Site Supplies	38400	19200	6400	0	64000
Office Expenses	51000	119000	68000	102000	340000
Licensing and Insurance	162000	0	324000	54000	540000
Total	1091400	187600	799200	237800	2316000

2

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
Removing Asbestos	1091400	Number of Jobs	850	$1,284.00
Estimating and Job Setup	$187,600.00	Number of non routine jobs	400	$469.00
Working on non routine job	$799,200.00	No allocation	100	$7,992.00

3

3-A

Computation of total cost and average cost per thousand square feet - Routine 1000 Square feet job
Particulars	Amount
Removing Asbestos	$1,284.00
Estimating and Job Setup	$469.00
Working on non routine job	$0.00
Total cost of job	$1,753.00
Average cost per thousand square feet (1753/1)	$1,753.00

3-B

Computation of total cost and average cost per thousand square feet - Routine 2000 Square feet job
Particulars	Amount
Removing Asbestos (1284x2)	$2,568.00
Estimating and Job Setup	$469.00
Working on non routine job	$0.00
Total cost of job	$3,037.00
Average cost per thousand square feet(3037/2)	$1,518.50

3-C

Computation of total cost and average cost per thousand square feet - Routine 2000 Square feet job
Particulars	Amount
Removing Asbestos (1284x2)	$2,568.00
Estimating and Job Setup	$469.00
Working on non routine job	$7,992.00
Total cost of job	$11,029.00
Average cost per thousand square feet(11029/2)	$5,514.50

	Routine 1000 Square feet job	Routine 2000 Square feet job	Non routine 2000 Square feet job
Total cost of job	$1,753.00	$3,037.00	$11,029.00
Average cost per thousand square feet	$1,753.00	$1,518.50	$5,514.50