Problem 7-18 Activity-Based Costing and Bidding on Jobs [LO7-2, L07-3, LO7-4] Me
ID: 2539193 • Letter: P
Question
Problem 7-18 Activity-Based Costing and Bidding on Jobs [LO7-2, L07-3, LO7-4] 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 $2.80 to determine the bid price. Since our average cost is only $2.31 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: Total Activity Activity Cost Pool Removing asbestos Estimating and job setup Working on nonroutine jobs Other (organization-sustaining costs Activity Measure Thousands of square feet Number of jobs Number of nonroutine jobs 800 thousand square feet 400 jobs 100 nonroutine jobs and idle capacity costs) Note: The 1e0 nonroutine jobs are included in the total of 40e jobs. Both nonroutine jobs and routine jobs require estimating and setup. NoneExplanation / Answer
Solution:
Part 1 --- First Stage Allocation of costs to the activity cost pools
Removing Asbestos
Estimating and Job Setup
Working on No routine Jobs
Other
Total
(A)
Wages and Salaries
$166,000
(332000*50%)
$33,200
(332000*10%)
$99,600
(332000*30%)
$33,200
(332000*10%)
$332,000
Disposal fees
$518,000
(740000*70%)
$0
$222,000
(740000*30%)
$0
$740,000
Equipment depreciation
$36,000
(90000*40%)
$4,500
(90000*5%)
$18,000
(90000*20%)
$31,500
(90000*35%)
$90,000
On-site supplies
$32,400
$13,500
$8,100
$0
$54,000
Office expenses
$24,000
$96,000
$36,000
$84,000
$240,000
Licensing and insurance
$110,000
$0
$264,000
$66,000
$440,000
Total cost
$886,400
$147,200
$647,700
$214,700
$1,896,000
Part 2 – Activity Rates for the activity cost pools
Activity Cost Pool
Expected Overhead Costs (A)
Expected Activity (B)
Activity Rate (C = A/B)
Removing asbestos
$886,400
800
Thousand Square feet
$1,108
per thousand square feet
Estimating and job setup
$147,200
400
jobs
$368
per job
Working on nonroutine job
$647,700
100
Non Routine jobs
$6,477
per non routine job
Part 3A to 3C --- Total Cost
Routine
Routine
Nonroutine
1000 Sq.ft. Job
2,000 Sq.ft. Job
2,000 Sq.ft. Job
Charges for Removing Asbestos
$1,108
$2,216
$2,216
Estimating and job setup
$368
$368
$368
Working on Nonroutine Job
$6,477
Total Cost of the Job
$1,476
$2,584
$9,061
Average Cost per thousand square feet
$1.48
(1476 / 1000)
$2.58
(2584 / 2000)
$9.06
(9061 / 2000)
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Removing Asbestos
Estimating and Job Setup
Working on No routine Jobs
Other
Total
(A)
Wages and Salaries
$166,000
(332000*50%)
$33,200
(332000*10%)
$99,600
(332000*30%)
$33,200
(332000*10%)
$332,000
Disposal fees
$518,000
(740000*70%)
$0
$222,000
(740000*30%)
$0
$740,000
Equipment depreciation
$36,000
(90000*40%)
$4,500
(90000*5%)
$18,000
(90000*20%)
$31,500
(90000*35%)
$90,000
On-site supplies
$32,400
$13,500
$8,100
$0
$54,000
Office expenses
$24,000
$96,000
$36,000
$84,000
$240,000
Licensing and insurance
$110,000
$0
$264,000
$66,000
$440,000
Total cost
$886,400
$147,200
$647,700
$214,700
$1,896,000