Mercer Asbestos Removal Company removes potentially toxic asbestos insulation an
ID: 2572080 • 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 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 $3.00 to determine the bid price. Since our average cost is only $2.67 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." ceiling plaster in industrial buildings. The on-site supervisors believe that 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 Activi Removing asbestos Estimating and job setup Working on nonroutine jobs Other (costs of idle capacity and organization-sustaining costs) ty tal Activ Thousands of square feet Number of jobs Number of nonroutine jobs 800 thousand squarefeet 500 jobs 100 nonroutine jobs None Note: The 100 nonroutine jobs are included in the total of 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Wages and salaries Disposal fees 414,000 80B,000 Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost 94, 000 61,000 310,000 510,000 S2,197, 000 Distribution of Resource Consumption Across Activities Renoving Estimating and Working on Asbestos her Total 108 Job Setup Nonroutine Jo Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance 508 70% 50% 70% 108 25% 108 08 108 20 35% 08 30 30% 158 108 258 60 100% 100 100% 100 100 1008 25% 0% 308 15%Explanation / Answer
1) FIRST STAGE ALLOCATION OF COSTS TO ACTIVITY COST POOLS: Removing asbestos Estimating & Job set up Working on non-routine jobs Others Total Wages and salaries 207000 41400 124200 41400 414000 Disposal fees 565600 0 242400 0 808000 Equipment depreciation 47000 9400 14100 23500 94000 On-site supplies 42700 12200 6100 0 61000 Office expenses 31000 108500 77500 93000 310000 Licensing and insurance 127500 0 306000 76500 510000 1020800 171500 770300 234400 2197000 2) ACTIVITY RATES: Activity Cost pool Cost Activity units Activity rate Removing asbestos 1020800 800 1276 per thousand Sq.ft Estimating and Job set up 171500 500 343 per job Working on non routine job 770300 100 7703 per non routine job 3-a) Total cost: Removing asbestos 1276 Estimating and Job set up 343 Total cost for 1000 square feet 1619 Average cost $ 1.62 3-b) Total cost: Removing asbestos 2552 Estimating and Job set up 343 Total cost for 2000 square feet 2895 Average cost $ 1.45 3-c) Total cost: Removing asbestos 2552 Estimating and Job set up 343 Working on non routine job 7703 Total cost for 2000 square feet 10598 Average cost $ 5.30