Question

3.

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 $2.755 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: Act ivity Cost Poo l Remov ing asbest os Est imat ing and job setup Working on nonroutine jobs Other (organization-sustaining costs and Activity Measure Total Act ivity Thousands of square feet Number of jobs Number of nonrout ine jobs 800 thousand square feet 400 jobs 100 nonrout ine jobs idle capacity costs) Note: The 100 nonrout ine jobs are included in the total of 400 jobs. Eoth nonrout ine jobs and routine jobs require est imat ing and setup None Costs for the Year ages and sal ar ies Disposal fees Equipment depreciat ion On-site suppl ies Off ice expenses Licensing and insurance Total cost $420, 000 814, 000 96, 000 62、000 320, 000 520, 000 $2,232,000 Distribut ion of Resource Consumpt ion Across Act ivities Working on Pemoving Estimating Nonroutine Asbest os and Job Setup Jobs 20% 40% 20% 10 20% Other 15%0 ages and sal aries Disposal fees Equipment depreciat ion On-site supplies Office xpenses Licensing and insurance Total 100% 100% 100% 100% 100% 53% 15% 40% 53% 15% 30 15%

Answer 1

Solution

Mercer Asbestos Removal Company

First-stage allocation of costs to the activity cost pools:

Mercer Asbestos Removal Company
First-stage allocation of costs to the activity cost pools:
	Removing Asbestos	Estimating and Job Setup	Working on non-routine jobs	Other	Total
Wages and Salaries	$210,000	$63,000	$84,000	$63,000	$420,000
Disposal Fees	$488,400	$0	$325,600	$0	$814,000
Equipment Depreciation	$38,400	$4,800	$19,200	$33,600	$96,000
On-site Supplies	$37,200	$18,600	$6,200	$0	$62,000
Office Expenses	$48,000	$112,000	$64,000	$96,000	$320,000
Licensing and Insurance	$130,000	$0	$312,000	$78,000	$520,000
Total Cost	$952,000	$198,400	$811,000	$270,600	$2,232,000

Note: the allocation of overhead costs is done based on percentage consumption across activities.

Computation of activity rates for the activity cost pool:

	Activity Cost	Activity Cost Pool	Activity rate
Removing Asbestos	$952,000	800,000 square feet	$1.19 per square feet
Estimating and job setup	$198,400	400 jobs	$496 per job
Working on non-routine jobs	$811,000	100 non-routine jobs	$8,110 non-routine jobs

	Routine 1,000 sq. ft job	Routine 2,000 squar feet	Nonroutine 2
Total cost of job	$1,686	$1,438	$5,493

Computations:

Total cost of routine 1,000 sq. ft. job = total cost/number thousand square feet

Total cost = cost of removing asbestos + cost of estimating and job setup

= ($1.19) x 1,000 + $496 = $1,686

Average cost = total cost/number of thousand square feet

= $1,686/1 = $1,686

Total cost of routine 2,000 square feet asbestos removal job:

(1.19 x 2,000) + 496 = $2,876

Average cost = $2,876/2 = $1,438

Total cost of non-routine 2,000 square feet asbestos removal job:

Total cost = cost of removing asbestos + cost of estimating and job setup + cost of working on non-routine jobs

= ($1.19 x 2,000) + 496 + 8,110 = $10,986

Average cost = 10,986/2 = $5,493