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 $2.70 to determine the bid price. Since our average cost is only $2.405 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	500	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 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup.

Costs for the Year
Wages and salaries	$	323,000
Disposal fees		759,000
Equipment depreciation		90,000
On-site supplies		56,000
Office expenses		250,000
Licensing and insurance		450,000
Total cost	$	1,928,000

Distribution of Resource Consumption Across Activities
	Removing Asbestos			Estimating and Job Setup			Working on Nonroutine Jobs			Other		Total
Wages and salaries	60	%		10	%		20	%		10	%	100	%
Disposal fees	60	%		0	%		40	%		0	%	100	%
Equipment depreciation	40	%		5	%		20	%		35	%	100	%
On-site supplies	70	%		20	%		10	%		0	%	100	%
Office expenses	15	%		35	%		20	%		30	%	100	%
Licensing and insurance	25	%		0	%		60	%		15	%	100	%

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

A B с E F H 1 2 Other Total 3 1 4 5 6 Wages and salaries Disposal fees Equipment depreciation On-site Supplies Office Expenses Licensing and Insurance Total Cost 7 Removing Estimating and Working on Asbestos Job setup Nonroutine Jobs 193,800 $ 32,300 $ 64,600 $ 455,400 $ $ 303,600 $ 36,000 $ 4,500 $ 18,000 $ 39,200 $ 11,200 $ 5,600 $ 37,500$ 87,500 $ 50,000 $ 112,500 $ $ 270,000 $ 874,400 $ 135,500 $ 711,800 $ $ $ $ $ $ $ $ 32,300 $ $ 31,500$ $ 75,000 $ 67,500 $ 206,300 $ 323,000 759,000 90,000 56,000 250,000 450,000 1,928,000 8 9 10 11 12 13 14 2 Activity Cost Pool Removing Asbestos Estimating and Job setup Working on Nonroutine Jobs Estimated OH Estimated driver Cost per activity $ 874,400 800 $ 1,093.00 $ 135,500 500 $ 271.00 $ 711,800 100 $ 7,118.00 15 per thousand square feet. per jobs per nonroutine jobs 16 17 18 19 20 3 1000-sq ft asbestos removal jobs. Activity Cost Pool Removing Asbestos Estimating and Job setup Working on Nonroutine Jobs Total Cost of the Job No.of thousand sq.ft Average Cost per thousand Sq.ft Cost per activity Activity driver $ 1,093 $ 271 $ 7,118 21 22 Cost per activity 11 $ 1,093 1 $ 271 0 $ $ 1,364 1 $ 1,364.00 23 24 25 26 27 4 2000-sq ft asbestos removal jobs.

A B D E F G 17 18 19 20 3 1000-sq ft asbestos removal jobs. Activity Cost Pool Removing Asbestos Estimating and Job setup Working on Nonroutine Jobs Total Cost of the Job No.of thousand sq.ft Average Cost per thousand Sq.ft Cost per activity Activity driver $ 1,093 $ 271 $ 7,118 21 22 Cost per activity 10 $ 1,093 1 $ 271 0 $ $ 1,364 1 $ 1,364.00 23 24 25 26 27 28 29 4 2000-sq ft asbestos removal jobs. Activity Cost Pool Removing Asbestos Estimating and Job setup Working on Nonroutine Jobs Total Cost of the Job No.of thousand sq.ft Average Cost per thousand Sq.ft Cost per activity Activity driver $ 1,093 $ 271 $ 7,118 30 31 Cost per activity 2 $ 2,186 1 $ 271 0 $ $ 2,457 2 $ 1,228.50 32 33 34 35 36 5 37 38 39 Nonroutine 2000-sq ft asbestos removal jobs. Activity Cost Pool Cost per activity Activity driver Removing Asbestos $ 2,186 Estimating and Job setup $ 271 Working on Nonroutine Jobs $ 7,118 Total Cost of the Job No.of thousand sq.ft Average Cost per thousand Sq.ft 40 41 Cost per activity 2 $ 4,372 1 $ 271 1 $ 7,118 $ 11,761 21 $ 5,880.50 42 $ 43 44 AC

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Workings:

A B с D E F G H 1 2 Removing Asbestos Estimating and Job setup Working on Nonroutine Jobs Other Total 3 4 5 6 1 Wages and salaries Disposal fees Equipment depreciation On-site Supplies Office Expenses Licensing and Insurance Total Cost 7 =H4*60% =H5*60% =H6*40% =H7*70% =H8*15% =H9*25% =SUM(D4:09) =H4*10% =H5*0% =H6*5% =H7* 20% =H8*35% =H9*0% =SUM(E4:E9) =H4*20% =H5*40% =H6*20% =H7*10% =H8*20% =H9*60% =SUM(F4:F9) =H4*10% 323000 =H5*0% 759000 =H6*35% 90000 =H7*0% 56000 =H8*30% 250000 =H9*15% 450000 =SUM(G4:59) =SUM(H4:H9) 8 9 10 11 12 Estimated OH 13 14 Estimated driver 800 2 Activity Cost Pool Removing Asbestos Estimating and Job setup Working on Nonroutine Jobs Cost per activity =D14/E14 =D15/E15 =D16/E16 =D10 =E10 =F10 15 500 per thousand square feet. per jobs per nonroutine jobs 16 100 17 18 19 =F13 Activity driver 1 20 21 31000-sq ft asbestos removal jobs. Activity Cost Pool Removing Asbestos Estimating and Job setup Working on Nonroutine Jobs Total Cost of the Job No.of thousand sq.ft Average Cost per thousand Sq.ft =F14 =F15 =F16 1 22 0 Cost per activity =D20*E20 =D21*E21 =D22*E22 =SUM(F20:F22) 1 =F23/F24 23 24 25 26 27 4 2000-sq ft asbestos removal jobs.

J17 A B C D E F G 17 18 19 Activity driver 1 20 =F13 =F14 =F15 =F16 21 3 1000-sq ft asbestos removal jobs. Activity Cost Pool Removing Asbestos Estimating and Job setup Working on Nonroutine Jobs Total Cost of the Job No.of thousand sq.ft Average Cost per thousand Sq.ft 1 22 0 Cost per activity =D20 E20 =D21*E21 =D22*E22 =SUM(F20:F22) 1 =F23/F24 23 24 25 26 27 28 =F19 =F20 Activity driver 2 29 30 1 4 2000-sq ft asbestos removal jobs. Activity Cost Pool Removing Asbestos Estimating and Job setup Working on Nonroutine Jobs Total Cost of the Job No.of thousand sq.ft Average Cost per thousand Sq.ft =F21 =D22 31 0 Cost per activity =D29*E29 =D30*E30 =D31*E31 =SUM(F29:F31) 2 =F32/F33 32 33 34 35 36 5 37 Activity driver 2 38 39 1 Nonroutine 2000- Sq ft asbestos removal jobs. Activity Cost Pool =F28 Removing Asbestos =F29 Estimating and Job setup =F30 Working on Nonroutine Jobs =D22 Total Cost of the Job No.of thousand sq.ft Average Cost per thousand Sq.ft 40 1 Cost per activity =D38*E38 =D39 E39 =D40*E40 =SUM(F38:F40) 2 =F41/F42 41 42 43 44

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