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 lob 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 $2.755 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 800 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. Costs for the Year Wages and salaries Disposal fees Equipment depreciation On-site supplies office expenses Licensing and insurance Total cost $ 420,000 814,000 96,000 62,000 320,000 520,000 $ 2, 232,000 Distribution of Resource Consumption Across Activities Estimating Working on Removing and Job Nonroutine Asbestos Setup Jobs Wages and salaries 50% 15% 20% Disposal fees 60% 0% 408 Equipment depreciation 40% 5% 20% On-site supplies 30% office expenses 35% Licensing and insurance Other 15% 35% 0% Total 100% 100% 100% 100% 100% 100% o un op op op un OOO 30 0%

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

solution: estimating Totals Removing working on Nonroutine Other asbestos & job setup wages and salaries disposal fees equipment depreciation onsite supplies office expense 15% 420000 0% 814000 20% 50% 15% 60% 40% 0% 5% 40% 20% 35% 96000 10% 60% 30% 0% 62000 35% 20% 30% 15% 320000 Licensing and insurance 25% 0% 60% 15% 520000 1)first stage allocations of costs to activity cost pools. Removing asbestos working on Totals estimating Other & Nonroutine job setup wages and salaries** disposal fees equipment depreciation onsite supplies office expense 63000 420000 210000 63000 84000 325600 488400 814000 38400 4800 19200 33600 96000 37200 18600 6200 62000 48000 112000 64000 96000 320000 Licensing and insurance 130000 312000 78000 520000 total 270600 2232000 198400 952000 811000 **First stage allocation = Tot al cost * percent for example wages in removing asbestos = 420000*50%=240000

2) activity rate activity cost pool total activity activity rate cost a/b b Removing asbestos Estimating & job setup working on nonroutine job 1,190.00 per thousand sq ft 496.00 per job 952000 800 198400 400 8,110.00 per nonroutine job 811000 100 3a) cost of job Activity Cost Pool |(b) Activity Rate Activity (a) (a) x (b) ABC Cost Removing asbestos Estimating & job setup working on nonroutine job (Not applicable) Total cost of job / No of sq ft in thousand cost per thousand sq ft 1,190.00 1,190.00 496.00 496.00 1,686.00 1.00 1,686.00 3b) cost of job Activity Cost Pool |(b) Activity Rate Activity (a) x (b) (a) ABC Cost Removing asbestos Estimating & job setup working on nonroutine job (Not applicable) 2,380.00 1,190.00 2 496.00 496.00 Total cost of job 2,876.00 / No of sq ft in thousand cost per thousand sq ft 2.00 1,438.00 3c) cost of job Activity Cost Pool (b) Activity Rate Activity |(a) x (b) ABC Cost (a) Removing asbestos Estimating & job setup working on nonroutine job 1,190.00 2,380.00 496.00 496.00 8,110.00 8,110.00 Total cost of job 10,986.00 / No of sq ft in thousand 2.00 cost per thous and sq ft 5,493.00