Chapter 7 Homework Question 3 (of 3) value: 5.00 points Mercer Asbestos Removal
ID: 2550703 • Letter: C
Question
Chapter 7 Homework Question 3 (of 3) value: 5.00 points 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 $2.50 to determine the bid price. Since our average cost is only $2.46 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 1,000 thousand square feet Activity Cost Pool Removing asbestos Estimating and job setup Working on nonroutine jobs Other (costs of idle capacity and Activity Measure 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 Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance 407,000 800,000 96,000 56,000 300,000 490,000 2,149,000 Total cost Distribution of Resource Consumption Across Activities Estimating Working on Removing and Job Nonroutine Total 100% 100% 100% 100% 100% 100% Asbestos Setup Jobs Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance 10% 0% 35% 40% 60% 15% 25% 10% 0% 5% 25% 35% 0% 15% 20% 60% 15%Explanation / Answer
STATEMENT SHOWING FIRST STAGE ALLOCATION OF COST TO ACTIVITY POOL BASIS OF Removing JOJb Setup Non Routine Others Total APPORTION Asbestos IN $ IN $ IN $ IN $ Wages 50:10:30:10 203,500 40,700 122,100 40,700 407,000 Disposal fess 70:0:30:0 560,000 0 240,000 0 800,000 Deprecctaion 40:5:20:35 38,400 4,800 19,200 33,600 96,000 On site supplies 60:25:15:0 33,600 14,000 8,400 0 56,000 Office supplies 15:35:20:30 45,000 105,000 60,000 90,000 300,000 Licensing and insurance 25:0:60:15 122,500 0 294,000 73,500 490000 TOTAL COST OF ACTIVITY 1,003,000 164,500 743,700 237,800 2,149,000 STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL Activity Total Expected Activity ACTIVITY COST POOL Measures Overheads Activity Rate Removal asbestos Sq. feet 1,003,000 1,000 1,003.00 Job Setuo jobs 164,500 500 329.00 Non Routine jbs non routine jobs 743,700 100 7,437.00 A: Cost of routine 1000 sq. feet Removal asbestos cost (1@1003) 1003 Job setup cost (1 @329) 329 Total cost 1332 Per 1000 sq. feet cost 1332 B. Cost of routine 2000 sq. feet Removal asbestos cost (2@1003) 2006 Job setup cost (1 @329) 329 Total cost 2335 Per 1000 sq. feet cost 1167.5 C. Non routine 2000 sq. feet Removal asbestos cost (2@1003) 2006 Job setup cost (1 @329) 329 Non routine job cost (1 job @ 7437) 7437 Total cost 9772 Per 1000 sq. feet cost 4886