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 $3.00 to determine the bid price. Since our average cost is only $2.675 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 Kemoving asbestos Thousands of square feet 800 thousand square feet Estimating and job setup Number of job Number of jobs jobs working on monroutine jobs Number of nonroutine Jobs 100 nonroutine Jobs Uther organization-sustaining costs and idle capacity costs) Note: The 100 nonroutine jobs are included in the total of 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup. None Costs for the Year Tapes and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost $ 414.000 800.000 94.000 61,000 310.000 510.000 $ 2, 197.000

Answer 1

1.

	Removing	Estimating and	Working on	Other	Total
	Asbestos	Job Setup	Nonroutine Jobs
Wages and salaries	207000	41400	124200	41400	414000
Disposal fees	565600	0	242400	0	808000
Equipment depreciation	47000	9400	14100	23500	94000
On-site supplies	42700	12200	6100	0	61000
Office expenses	31000	108500	77500	93000	310000
Licensing and insurance	127500	0	306000	76500	510000
Total cost	1020800	171500	770300	234400	2197000

2.

Activity Cost Pool	Activity Rate $
Removing asbestos	1276	per thousand square feet
Estimating and job setup	343	per job
Working on nonroutine jobs	7703	per nonroutine job

Working:

Activity Cost Pool	Total cost $	Total Activity		Activity Rate $
Removing asbestos	1020800	800	thousand square feet	1276	per thousand square feet
Estimating and job setup	171500	500	jobs	343	per job
Working on nonroutine jobs	770300	100	nonroutine jobs	7703	per nonroutine job

3a. to c.

	Routine	Routine	Nonroutine
	1,000 sq. ft.	2,000 sq. ft.	2,000 sq. ft.
	job	job	job
Total cost of the job	$                                                          1,619	$                                      2,895	$                           10,598
Average Cost per thousand square feet	$                                                    1,619.00	$                                1,447.50	$                       5,299.00

Working:

3.a.	Total cost of the job	($1276 + $343) = $1619
	Average cost per thousand square feet	$                                                          1,619
3.b.	Total cost of the job	[(2 x $1276) + $343] = $2895
	Average cost per thousand square feet	($2895/2) = $1447.50
3.c.	Total cost of the job	[(2 x $1276) + $343 + $7703 = $10598
	Average cost per thousand square feet	($10598/2) = $5299