Question

Mercer Asbestos Removal Company removes potentially toxic asbestos Insulation and related products from bulldings. 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 celling plaster In Industrial buildings. The on-site supervisors belleve 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 $2,60 to determine the bld price. Since our average cost is only $2.35 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. tivity Coat Pool Activity Measure Total activity Removing asbestos Thousands of square feet 1,000 thousand square feet Estimating and job setup Number of Jobs 500 job Working on non routine Jobs Number of nonroutine jobs 100 no routine jobs Other organization-outaining costs and Idle capacity costs) None Hotel The 100 nonroutine jobs are included in the total of 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Coata for the Year Wages and salaries Disposal fees Equipment depreciation On-site supplies Ottice expenses Licensing and insurance Total cost 5 402,000 737.000 104.000 66.000 330.000 460,000 $ 2,097.000 Total 100 Distribution of Resource Consumption Across Activities Estimating working on Removing and Job Sohroutine Asbestos Setup Joba wages and salaries Disposal fees 600 Equipment depreciation 503 On-site supplies 209 Ottice expenses 100 Licensing and insurance 1000 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

1. Allocation of costs to the Activity Cost pools

	Removing Asbestos	Estimating and Job Setup	Working on Nonroutine Jobs	Other	Total
Wages and Salaries	$201000 ($ 402000x50%)	$60300 ($ 402000x15%)	$80400 ($ 402000x20%)	$60300 ($ 402000x15%)	$402000
Disposal Fees	$442200 ($737000x60%)	0	$294800 ($737000x40%)	0	$737000
Equipment Depreciation	$52000 ($104000x50%)	$10400 ($104000x10%)	$15600 ($104000x15%)	$26000 ($104000x25%)	$104000
Onsite Supplies	$44800 ($64000x70%)	$12800 ($64000x20%)	$6400 ($64000x10%)	0	$64000
Office Expenses	$33000 ($330000x10%)	$115500 ($330000x35%)	$82500 ($330000x25%)	$99000 ($330000x30%)	$330000
Licensing and insurance	$138000 ($460000x30%)	0	$230000 ($460000x50%)	$92000 ($460000x20%)	$460000
Total Cost	$911000	$199000	$709700	$277300	$2097000

2. Computation of Activity rates for the activity cost pools

Acivity Cost Pool	Total Cost	Activity Measure	Total Activity	Cost Per Activity
Removing Asbestos	$911000	Thousands of Square Feet	1000 thousands Square Feet	$911
Estimating and Job Setup	$199000	Number of Jobs	500 Jobs	$398
Working on Nonroutine Jobs	$709700	Number of Nonroutine Jobs	100 Non-Routine Jobs	$7097
Other	$277300	None	Estimating and setup cost (i.e 500 jobs)	$554.6

3. Detemine Total Cost and average cost per thousand square feet

a. A routine 1000 square foot asbestos removal.

* Removing Asbestos   = $ 911

*Estimating and Job Setup    = $ 398

*Other =$555

Total Cost =$1864

Average Cost per thousand Square feet = $1.864

b. A routine 2000 square foot asbestos removal.

* Removing Asbestos   = $ 911

*Estimating and Job Setup    = $ 398

*Other =$555

Total Cost =$1864

Average Cost per thousand Square feet = $0.932

c. A nonroutine 1000 square foot asbestos removal.

* Removing Asbestos   = $ 911

*working on nonroutine jobs    = $ 7097

*Other =$ 555

Total Cost =$ 8563

Average Cost per thousand Square feet = $8.563