Mercer Asbestos Removal Company removes potentially toxic asbestos insulation an
ID: 2398692 • Letter: M
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:
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.
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.Explanation / Answer
1. Perform the first-stage allocation of costs to the activity cost pools. Total Cost xDistribution of Resource Consumption Across Activities Total Cost RemovingAsbestos Estimating and Job Setup Working on Nonroutine jobs Other % Amount % Amount % Amount % Amount Total Wages and salaries $470,000 60 $282,000 10 $47,000 20 $94,000 10 $47,000 $470,000 Disposal fees $801,000 60 $480,600 0 $0 40 $320,400 0 $0 $801,000 Equipment depreciation $110,000 50 $55,000 10 $11,000 15 $16,500 25 $27,500 $110,000 On-site supplies $68,000 60 $40,800 25 $17,000 15 $10,200 0 $0 $68,000 Office expenses $370,000 10 $37,000 40 $148,000 15 $55,500 35 $129,500 $370,000 Licensing and insurance $570,000 30 $171,000 0 $0 50 $285,000 20 $114,000 $570,000 Total Cost $2,389,000 $1,066,400 $223,000 $781,600 $318,000 $2,389,000 2. Compute the activity rates for the activity cost pools. Activity Cost pool Total cost Total Activity Activity Rate = Total Cost /Total activity Removing asbestos $1,066,400 800 $1,333 per thousand square feet Estimating and job set up $223,000 500 $446 per job Working on nonroutine job $781,600 100 $7,816 per nonroutine job Total Cost and Average cost per thousand Square feet routine 1000 Square feet Abestors removal Job Description Amount Removing asbestos ($1333 per Thousand) $1,333 Estimating and job set up ($446 per Job) $446 Working on nonroutine job $0 Total Cost of the Job $1,779 Average Cost per Thousand Sq Feet ($1779/1) $1,779 Total Cost and Average cost per thousand Square feet routine 2000 Square feet Abestors removal Job Description Amount Removing asbestos ($1333 X2 per Thousand) $2,666 Estimating and job set up ($446 per Job) $446 Working on nonroutine job $0 Total Cost of the Job $3,112 Average Cost per Thousand Sq Feet ($3112/2) $1,556