Problem 7-18 Activity-Based Costing and Bidding on Jobs [LO7-2, LO7-3, L07-4] Me
ID: 2401739 • Letter: P
Question
Problem 7-18 Activity-Based Costing and Bidding on Jobs [LO7-2, LO7-3, L07-4] Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products ldings. There has been a long-simmering dispute between the company's estimator and the work from buil supervisors. The routine work such as removal of asbestos on-site supervisors claim that the estimators do not adequately distinguish between 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 of asbestos. As directed by top management, I simply multiply the square footage by $2.50 to cleared determine the bid price. Since our average cost is only $2.46 per square foot, that leaves enough cushion 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 Data from the activity-based costing system follow Total Activity 1,000 thousand square feet Activity Cost Pool Activity Measure Removing asbestos Estimating and job setup Working on nonroutine jobs Other (costs of idle capacity and Thousands of square feet Number of jobs Number of nonroutine jobs 500 jobs 100 nonroutine jobs organization-sustaining 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 S 407,000 800,000 96,000 56,000 300,000 490,000 Wages and salaries Disposal fees on On-site supplies Office expenses Licensing and insurance Total cost s 2,149,000Explanation / Answer
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First stage allocation of cost to activity cost pools Particulars Total Cost Removing Asbestos Estimating and Job Setup Working on non routine job Others % Amount % Amount % Amount % Amount Wages & Salaries $407,000.00 50% $203,500.00 10% $40,700.00 30% $122,100.00 10% $40,700.00 Disposal Fees $800,000.00 70% $560,000.00 0% $0.00 30% $240,000.00 0% $0.00 Equipment depreciation $96,000.00 40% $38,400.00 5% $4,800.00 20% $19,200.00 35% $33,600.00 On Site Supplies $56,000.00 60% $33,600.00 25% $14,000.00 15% $8,400.00 0% $0.00 Office Expenses $300,000.00 15% $45,000.00 35% $105,000.00 20% $60,000.00 30% $90,000.00 Licensing and Insurance $490,000.00 25% $122,500.00 0% $0.00 60% $294,000.00 15% $73,500.00 Total $2,149,000.00 $1,003,000.00 $164,500.00 $743,700.00 $237,800.00