Mercer Asbestos Removal Company removes potentially toxic asbestos insulation an
ID: 2518494 • 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 $3.60 to determine the bid price. Since our average cost is only $2.85 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:
Note: The 100 nonroutine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.
Distribution of Resource Consumption Across Activities
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. (Round the "Average cost" to 2 decimal places.)
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.
organization-sustaining costs) None
Explanation / Answer
Solution:
Part 1 --- Perform the first-stage allocation of costs to the activity cost pools
Removing Asbestos
Estimating and Job Setup
Working on Nonroutine Jobs
Other
Total
Wages and salaries
$230,000
$69,000
$92,000
$69,000
$460,000
Disposal fees
$603,400
$0
$258,600
$0
$862,000
Equipment depreciation
$52,000
$10,400
$15,600
$26,000
$104,000
On-site supplies
$39,600
$19,800
$6,600
$0
$66,000
Office expenses
$54,000
$126,000
$72,000
$108,000
$360,000
Licensing and insurance
$140,000
$0
$336,000
$84,000
$560,000
Total Cost
$1,119,000
$225,200
$780,800
$287,000
$2,412,000
Part 2 --- Activity rates for the activity cost pools
Activity Cost pools
Overhead Costs (A)
Total Activity (B)
Activity Rate
(A / B)
Charges for Removing Asbestos
$1,119,000
750
thousand square feet
$1,492
per thousand squarefeet
Estimating and job setup
$225,200
400
jobs
$563
per job
Working on Nonroutine Job
$780,800
100
nonroutine jobs
$7,808
per nonroutine job
Other
$287,000
Non
Total
$2,412,000
Part 3 –
Routine
Routine
Nonroutine
1000 Sq.ft. Job
2,000 Sq.ft. Job
2,000 Sq.ft. Job
Charges for Removing Asbestos
$1,492
$2,984
$2,984
Estimating and job setup
$563
$563
$563
Working on Nonroutine Job
$7,808
Total Cost of the Job
$2,055
$3,547
$11,355
Average Cost per thousand square feet
$2.06
$1.77
$5.68
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Removing Asbestos
Estimating and Job Setup
Working on Nonroutine Jobs
Other
Total
Wages and salaries
$230,000
$69,000
$92,000
$69,000
$460,000
Disposal fees
$603,400
$0
$258,600
$0
$862,000
Equipment depreciation
$52,000
$10,400
$15,600
$26,000
$104,000
On-site supplies
$39,600
$19,800
$6,600
$0
$66,000
Office expenses
$54,000
$126,000
$72,000
$108,000
$360,000
Licensing and insurance
$140,000
$0
$336,000
$84,000
$560,000
Total Cost
$1,119,000
$225,200
$780,800
$287,000
$2,412,000