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 $2.80 to determine the bid price. Since our average cost is only $2.585 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 Removing asbestos Estimating and job setup Working on nonroutine jobs Other (organization- sustaining costs and idle capacity costs) Note: The 100 nonroutine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup Activity Measure Total Activity Thousands of square feet Number of jobs Number of nonroutine jobs 850 thousand square feet 400 jobs 100 nonroutine jobs None Costs for the Year Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance 400,000 791,000 96,000 60,000 300,000 500,000 Total cost 2,147,000

Answer 1

1)

	Removing Asbestos	Estimating and Job setup	Working on no routine jobs	other	Total
Wages and salaries	400000*60%=240000	400000*10%=40000	400000*20%=80000	400000*10%=40000	400000
Disposal fees	791000*60%=474600	0	791000*40%= 316400	0	791000
Equipment depreciation	96000*40%=38400	96000*5%=4800	96000*25%=24000	96000*30%= 28800	96000
On-site supplies	60000*60%=36000	60000*25%= 15000	60000*15%= 9000	0	60000
Office expense	300000*10%=30000	300000*35%= 105000`	300000*25%= 75000	300000*30%= 90000	300000
Licensing and insurance	500000*30%=150000	0	500000*50%=250000	500000*20%=100000	500000
Total cost	969000	164800	754400	258800	2147000

2)

Activity	Activity rates
Removing asbestos	969000/850= $ 1140 per 1000 Sq Ft
Estimating and Job setup	164800/400 = $ 412 per Job
working on non routine jobs	754400/100 =$ 7544 per non routine job

3)

a)

Activity	Routine 1000Sq.ft.Job	Routine 2000Sq.ft.Job	Non Routine 2000Sq.ft.Job
Removing asbestos	1140*1000/1000=1140	1140*2000/1000= 2280	2280
Estimating and Job setup	412	412	412
working on non routing jobs	0	0	7544
Total cost of Job	1552	2692	10236
Average cost per 1000 Sq Ft.	1552/1 =$ 1552 per 1000Sq ft	2692/2 =$ 1346 per 1000Sq ft	10236/2 =$ 5118 per 1000 sq ft