Mercer Asbestos Removal Company removes potentially toxic asbestos insulation an
ID: 2538027 • 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 $2.80 to determine the bid price. Since our average cost is only $2.58 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.
Req 3A to 3C
Perform the first-stage allocation of costs to the activity cost pools.
Compute the activity rates for the activity cost pools.
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 per thousand square feet" 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.
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Activity Cost Pool Activity Measure Total Activity Removing asbestos Thousands of square feet 800 thousand square feet Estimating and job setup Number of jobs 400 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 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.Explanation / Answer
Req 1: STATEMENT SHOWING FIRST STAGE ALLOCATION OF COST TO ACTIVITY POOL BASIS OF Removing Job Setups Non Routine Others Total APPORTION Asbestos in $ IN $ IN $ IN $ IN $ Wages and salaries 60:10:20:10 223,200 37,200 74,400 37,200 372,000 Disposal 60:0:40:0 465,000 0 310,000 0 775,000 Equipment depreciation 50:10:15:25 48,000 9,600 14,400 24,000 96,000 On site supplies 70:20:10:0 40,600 11,600 5,800 0 58,000 Office expense 10:40:20:30 28,000 112,000 56,000 84,000 280,000 Licencing and insuracne 25:0:60:15 120,000 0 288,000 72,000 480000 TOTAL COST OF ACTIVITY 924,800 170,400 748,600 217,200 2,061,000 Req 2: STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL Activity Total Expected Activity ACTIVITY COST POOL Measures Overheads Activity Rate Removing asbestos thousand sq ft 924800 800 1156 per thousand sq. ft Job setups Number of jobs 170,400 400 426 per job Non routine Non routine job 748,600 100 7486 per non routine job Req 3: Option-A Option-B Option-C Number of sq. ft in htousands 1 2 2 Number of jobs 1 1 1 Number of Non routine jojbs 0 0 1 Overhead assigned Removing asbestos (@$1156 per thousand sq. ft) 1156 2312 2312 Job setups(@$426 per job) 426 426 426 Non routine (@$ 7486 per non routine job) 0 0 7486 Total cost 1582 2738 10224 Divide by Thouosand sq. ft 1 2 2 Cost per thousand sq. ft 1582 1369 5112