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 $2.805 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.

Cost for the Year
Wages and salaries	$	440,000
Disposal fees		824,000
Equipment depreciation		108,000
On-site supplies		64,000
Office expenses		340,000
Licensing and insurance		540,000
Total cost	$	2,316,000

Distribution of Resource Consumption Across Activities
	Removing Asbestos	Estimating and Job Setup	Working on Nonrouting Jobs	Other	Total
Wager and salaries	50%	10%	30%	10%	100%
Disposal Fees	70%	0%	30%	0%	100%
Equipment depreciation	40%	5%	20%	35%	100%
on-site supplies	60%	30%	10%	0%	100%
Office expense	15%	35%	20%	30%	100%
Licensing and insurance	30%	0%	60%	10%	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

1		Removing	Estimating and	Working on
	Particulars	Asbestos	Job setups	Nonrouting jobs	Other	Total
	Wages and salaries	220000	44000	132000	44000	440000
	Disposal fees	576800	0	247200	0	824000
	Equipment depreciation	43200	5400	21600	37800	108000
	On sites supplies	38400	19200	6400	0	64000
	Office supplies	51000	119000	68000	102000	340000
	Licensing and insurance	162000	0	324000	54000	540000
	Total	1091400	187600	799200	237800	2316000
2	Activity rates	Amount	Total Activity	Activity rate
	Removing Asbestos	1091400	850	1284	per thousand square feet
	Estimating and job setups	187600	400	469	per jobs
	Working on nonrouting jobs	799200	100	7992	per nonroutine jobs
3	Per Thousand square feet	Routine jobs	Nonroutine jobs	Total
A	1284	469		1753
B	2568	469		3037
C	2568		7992	10560