Question

Activity-Based Costing and Bidding on Jobs Vance Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company's estimator has been involved in a long- simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between routine work such as removal of asbestos insulation around heating pipes in older homes and non-routine work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-ste Supervisors believe that non-routine 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 tops management,I simply multiply the square metres by $4,000 per thousand square metres to determine the bid price. Since our average cost is only $3.000 per thousand square metres, that leaves enough cushion to take care of the additional costs of non- routine work that shows up. Besides, it is dficult 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 Estimating and job setup Working on non-routine jobs Other (costs of idle capacity and organization-sustaining costs) Thousands of square metres Number of jobs Number of non-routine jobs 500,000 m2 200 jobs 25 non-routine jobs Not applicable; these costs are not allocated to jobs The total number of jobs includes non-routine jobs as well as routine jobs. Non-routine jobs as well as routine jobs require estimating and setup work Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost $200,000 600,000 80.000 60,000 190,000 370.000 $1,500,000 Distribution of Resource Consumption across Activity Cost Pools Estimating Working on Non-routine Jobs Removing and Job Setup Other Total Asbestos 15% 100 % 0 % 100 % 10% 100 % 10% 100 % 20% 100 % 10% 100 % 10 % 35% 30% 40% Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance 40% 70% 50% 0% 0 % 15% 20% 30% 40% 55% 10% 50 % 40% 0 % 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 metres of each of the following jobs according system to the activity-based c re.metre ashestos removal job ost

Answer 1

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Part 1
	Activity Cost Pools
	Removing asbestos		Estimating and job setup		Working on non-routine jobs		Other		Totals
Wages and salaries	$    80,000		$      20,000		$           70,000		$           30,000		$    200,000
Disposal fees	420,000		-0-		180,000		-0-		600,000
Equipment depreciation	40,000		-0-		32,000		8,000		80,000
On-site supplies	33,000		9,000		12,000		6,000		60,000
Office expenses	19,000		76,000		57,000		38,000		190,000
Licensing and insurance	185,000		-0-		148,000		37,000		370,000
Total cost	$ 777,000		$    105,000		$         499,000		$         119,000		$ 1,500,000
Part 2
Activity Cost Pool	Total Cost		Total Activity				Activity Rate
Removing asbestos	$ 777,000		500		1000's sq. metres		$        1,554.00		per thousand square metres
Estimating and job setup	105,000		200		Number of jobs		525.00		per job
Working on non-routine jobs	499,000		25		Number of non-routine jobs		19,960.00		per non-routine job