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 $3.20 to determine the bid price. Since our average cost is only $2.745 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	$	470,000
Disposal fees		801,000
Equipment depreciation		110,000
On-site supplies		68,000
Office expenses		370,000
Licensing and insurance		570,000
Total cost	$	2,389,000

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	50	%		10	%		15	%		25	%	100	%
On-site supplies	60	%		25	%		15	%		0	%	100	%
Office expenses	10	%		40	%		15	%		35	%	100	%
Licensing and insurance	30	%		0	%		50	%		20	%	100	%

1. Perform the first-stage allocation of costs to the activity cost pools.

Answer 1

Mercer Asbestos Removal Company Distribution of Resource Consumption Across Activities Other 47000 Removing Estimating & Asbestos Job Setup Wages and salaries 282000 47000 Disposal fees 480600 Equipment depreciation 55000 11000 On-site supplies 40800 17000 Office expenses 37000 148000 Licensing and insurance 171000 Totals 1066400 223000 Working on Nonroutine Jobs 94000 320400 16500 10200 55500 285000 781600 27500 Total 470000 801000 110000 68000 370000 570000 2389000 129500 114000 318000

1 Mercer Asbestos Removal Cor 2 3 Distribution of Resource Cons 5 Estimating & Job Setup =F7*0.1 Other =F7*0.1 0 Removing Asbestos =F7*0.6 =F8*0.6 =F9*0.5 =F10*0.6 =F11*0.1 =F12*0.3 =SUM(B7:B12) 6 7 Wages and salaries 8 Disposal fees 9 Equipment depreciation 10 On-site supplies 11 Office expenses 12 Licensing and insurance 13 Totals =F9*0.25 Working on Nonroutine Jobs =F7*0.2 =F8*0.4 =F9*0.15 =F10*0.15 =F11*0.15 =F12*0.5 =SUM(D7:012) =F9*0.1 =F10*0.25 =F11*0.4 =0 =SUM(C7:C12) Total 470000 801000 110000 68000 370000 570000 =SUM(F7:F12) =F11*0.35 =F12*0.2 =SUM(E7:E12)