Question

Activity-Based Costing and Bidding on Jobs

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 estima- tor 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 $2.50 to determine the bid price. Since our average cost is only $2.175 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 non-routine jobs Number of non-routine 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$ 300,000
Disposal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	700,000
Equipment depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	90,000
On-site supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	50,000
Office expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	200,000
Licensing and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	400,000
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$1,740,000

Distribution of Resource Consumption Across Activities
	Removing Asbestos	Estimating and Job Setup	Working on Nonroutine Jobs	Other	Total
Wages and salaries . . . . . . . . . . . . . . .	50%	10%	30%	10%	100%
Disposal fees . . . . . . . . . . . . . . . . . . . . .	60%	0%	40%	0%	100%
Equipment depreciation . . . . . . . . . . .	40%	5%	20%	35%	100%
On-site supplies . . . . . . . . . . . . . . . . . .	60%	30%	10%	0%	100%
Office expenses . . . . . . . . . . . . . . . . . .	10%	35%	25%	30%	100%
Licensing and insurance . . . . . . . . . . .	30%	0%	50%	20%	100%

Required:

1. 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.

2. Given the results you obtained in (1) above, do you agree with the estimator that the com- pany’s present policy for bidding on jobs is adequate?

Answer 1

Solution:-

Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings

a. Calculate a routine 1,000-square-foot asbestos removal job.

Routine job - square feet	1,000
Removing asbestos (970*1K sq feet)	$       970.00
Estimating and job set-up (239*1)	239.00
Non routine job (not applicable)	-
Total cost of the job	$    1,209.00
Cost per thousand square feet	$    1,209.00

b. Calculate a routine 2,000-square-foot asbestos removal job.

Routine job - square feet	2,000
Removing asbestos(970*2K sq feet)	$    1,940.00
Estimating and job set-up(239*1)	239.00
Non routine job	-
Total cost of the job	$    2,179.00
Average cost per thousand square feet	$    1,089.50

2179/2

C. Calculate a non routine 2,000-square-foot asbestos removal job.

Non routine job - square feet	2,000
Removing asbestos	$    1,940.00
Estimating and job set-up	239.00
Non routine job	6,430.00
Total cost of the job	$    8,609.00
Average cost per thousand square feet	$    4,304.50