Problem 7-18 Activity-Based Costing and Bidding on Jobs [LO7-2, L07-3, L07-4] Me
ID: 2512416 • Letter: P
Question
Problem 7-18 Activity-Based Costing and Bidding on Jobs [LO7-2, L07-3, L07-4] 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 $3.60 to determine the bid price. Since our average cost is only $2.77 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 Removing asbestos Estimating and job setup Activity Measure Thousands of square feet Number of iobs Number of nonroutine jobs Total Activity 800 400 jobs 100 thousand square orking on nonroutine jobs nonroutine Jobs Other (organization-sustaining costs and idle capacity costs) Note: The 100 nonroutine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup NoneExplanation / Answer
1. perform the First Stage Allocation of Cost to the activity Cost pool, Description Removing Asbestos Estimating and job Setup Working on Non Routine Job other Total Wages & Salaries $240,000 $72,000 $96,000 $72,000 $480,000 Disposal Fees $617,400 $0 $264,600 $0 $882,000 Equipment Description $43,200 $5,400 $21,600 $37,800 $108,000 On site Supplies $47,600 $13,600 $6,800 $0 $68,000 Office Expense $57,000 $133,000 $76,000 $114,000 $380,000 Licensing & Insurance $174,000 $0 $290,000 $116,000 $580,000 Total Cost $1,179,200 $224,000 $755,000 $339,800 $2,498,000 2. Computation of activity Rate for each Cost Pool Activity Cost Pool Cost Pool No of Activity Activity Rate Activity measure Removing Asbestos $1,179,200 800 $1,474 Thousand of Sq. Feet Estimating and job Setup $224,000 400 $560 Number of job Working on Non Routine Job $755,000 100 $7,550 Number of Non Routine Job 3. (a) Computation of 1000 Sq Foot Asbestos removal job Description Amount Removing Asbestos $1,474.00 Estimating and job Setup $560.00 Working on Non Routine Job $0.00 Total Cost of the Job $2,034.00 Average Cost /thousand Sq. Foot $2,034.00 3. (b) Computation of 2000 Sq Foot Asbestos removal job Description Amount Removing Asbestos $2,948.00 Estimating and job Setup $560.00 Working on Non Routine Job $0.00 Total Cost of the Job $3,508.00 Average Cost /thousand Sq. Foot ($3508/2) $1,754.00 3. (c) Computation of non Routine 2000 Sq Foot Asbestos removal job Description Amount Removing Asbestos ($1474*2) $2,948.00 Estimating and job Setup $560.00 Working on Non Routine Job $7,550.00 Total Cost of the Job $11,058.00 Average Cost /thousand Sq. Foot ($11058/2) $5,529.00