Question

Problem 7-18 Activity-Based Costing and Bidding on Jobs (L07-2, LO7-3, LO7.4) 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 $2.80 to determine the bid price. Since our average cost is only $2.585 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 850 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 400,000 791,000 96,000 60,000 300,000 500,000 $ 2,147,000

Answer 1

1)

	Removing asbestos	Estimating and Job Setup	Working on Nonroutine Jobs	Other	Total
Wages and salaries	(400000*60%)= $240000	(400000*10%)= $40000	(400000*20%)= $80000	(400000*10%)= $40000	$400000
Disposal fees	(791000*60%)= 474600	-	(791000*40%)= 316400	-	791000
Equipment depreciation	(96000*40%)= 38400	(96000*5%)= 4800	(96000*25%)= 24000	(96000*30%)= 28800	96000
On-site supplies	(60000*60%)= 36000	(60000*25%)= 15000	(60000*15%)= 9000	-	60000
Office expenses	(300000*10%)= 30000	(300000*35%)=105000	(300000*25%)= 75000	(300000*30%)= 90000	300000
Licensing and insurance	(500000*30%)= 150000	-	(500000*50%)= 250000	(500000*20%)= 100000	500000
Total	$969000	$164800	$754400	$258800	$2147000

2) Activity rate= Activity cost pools/Total activity

Removing asbestos= $969000/850= $1140 per thousand square feet

Estimating and Job Setup= $164800/400= $412 per job

Working on Nonroutine Jobs= $754400/100= $7544 per nonroutine job

3-a) Calculation of A routine 1000-square-foot asbestos removal job

Removing asbestos (1*$1140)	$1140
Estimating and Job Setup (1*$412)	412
Working on Nonroutine Jobs	0
Total cost	$1552
Average cost per thousand square feet ($1552/1 thousand square feet)	$1552

b) Calculation of A routine 2000-square-foot asbestos removal job

Removing asbestos (2*$1140)	$2280
Estimating and Job Setup (1*$412)	412
Working on Nonroutine Jobs	0
Total cost	$2692
Average cost per thousand square feet ($2692/2 thousand square feet)	$1346

c) Calculation of A nonroutine 2000-square-foot asbestos removal job

Working on Nonroutine Jobs (1*$7544)	$7544
Removing asbestos (2*$1140)	2280
Estimating and Job Setup (1*$412)	412
Total cost	$10236
Average cost per thousand square feet ($10236/2 thousand square feet)	$5118