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 $2.50 to determine the bid price. Since our average cost is only $2.455 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: Activity Cost Pool Activity Measure Total Activity Removing asbestos Thousands of square feet 1,000 thousand square feet Estimating and job setup Number of jobs 500 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 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Costs for the Year Wages and salaries $ 407,000 Disposal fees 800,000 Equipment depreciation 96,000 On-site supplies 56,000 Office expenses 300,000 Licensing and insurance 490,000 Total cost $ 2,149,000 Distribution of Resource Consumption Across Activities Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total Wages and salaries 50 % 10 % 30 % 10 % 100 % Disposal fees 70 % 0 % 30 % 0 % 100 % Equipment depreciation 40 % 5 % 20 % 35 % 100 % On-site supplies 60 % 25 % 15 % 0 % 100 % Office expenses 15 % 35 % 20 % 30 % 100 % Licensing and insurance 25 % 0 % 60 % 15 % 100 % Required: 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
Disposal fees
Equipment depreciation
On-site supplies
Office expenses
Licensing and insurance
Total cost

2. Compute the activity rates for the activity cost pools.

Activity Cost Pool	Activity Rate
Removing asbestos		per thousand square feet
Estimating and job setup		per job
Working on nonroutine jobs		per nonroutine job

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.

Routine 1,000 sq. ft. job	Routine 2,000 sq. ft. job	Nonroutine 2,000 sq. ft. job
Total cost of the job
Average Cost per thousand square feet

Answer 1

1. Perform the first-stage allocation of costs to the activity cost pools.

Answer:

	Removing Asbestos	Estimating and Job Setup	Working on Non-routine Jobs	Other	Total
Wages and Salaries	203,500	40,700	122,100	40,700	407,000
Disposal fees	560,000	0	240,000	0	800,000
Equipment depreciation	38,400	4,800	19,200	33,600	96,000
On-site supplies	33,600	14,000	8,400	0	56,000
Office expenses	45,000	105,000	60,000	90,000	300,000
Licensing and Insurance	122,500	0	294,000	73,500	490,000
Total	1,003,000	164,500	743,700	237,800	2,149,000

Calculation

Wages and salaries:

Removing asbestos = 50% × $407,000= $203,500

Estimating and Job Setup = 10% × $407,000= $40,700

Working on Nonroutine Jobs = 30% × $407,000= $122,100

Other = 10% × $407,000= 40,700

Disposal fees:

Removing asbestos = 70% × $800,000 = $560,000

Estimating and Job Setup = 0% × $800,000 = $0

Working on Nonroutine Jobs = 30% × $800,000 = $240,000

Other = 0% × $800,000 = $0

Equipment depreciation:

Removing asbestos = 40% × $96,000 = $38,400

Estimating and Job Setup = 5% × $96,000 = $4,800

Working on Nonroutine Jobs = 20% × $96,000 = $19,200

Other = 35% × $96,000 = $33,600

On-site supplies:

Removing asbestos = 60% × $56,000 = $33,600

Estimating and Job Setup = 25% × $56,000 = $14,000

Working on Nonroutine Jobs = 15% × $56,000 = $8,400

Other = 0% × $56,000 = $0

Office expenses:

Removing asbestos = 15% × $300,000 = $45,000

Estimating and Job Setup = 35% × $300,000 = $105,000

Working on Nonroutine Jobs = 0% × $300,000 = $60,000

Other = 30% × $300,000 = $90,000

Licensing and insurance:

Removing asbestos = 25% × $490,000 = $122,500

Estimating and Job Setup = 0% × $490,000 = $0

Working on Nonroutine Jobs = 60% × $490,000 = $294,000

Other = 15% × $490,000 = $73,500

2. Compute the activity rates for the activity cost pools.

Answer:

Activity Cost Pool	Activity Rate
Removing Asbestos	1003 per thousand square foot
Estimating and Job Setup	329 per job
Working on Nonroutine Jobs	7,437 per non-routine job

Calculation:

Activity Cost Pool	Total Cost (a)	Activity Quantity (b)	Activity Rate (a)/(b)
Removing Asbestos	1,003,000	1,000 square feet	1003 per thousand square foot
Estimating and Job Setup	164,500	500 jobs	329 per job
Working on Nonroutine Jobs	743,700	100 non-routine jobs	7,437 per nonroutine job

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.

Answer:

	Routine 1,000 sq. ft. job	Routine 2,000 sq. ft. job	Nonroutine 2,000 sq. ft. job
Total Cost of the job	1,332.0	2,335.0	9,772.0
Average Cost per thousand square feet	1,332.0	1,167.5	4,886.0

Calculation:

a. A routine 1,000-square-foot asbestos removal job.

Activity Cost Pool	Activity Rate (a)	Activity Quantity (b)	Cost Allocated (a)*(b)
Removing Asbestos	1003 per thousand square foot	1	1,003
Estimating and Job Setup	329 per job	1	329
Working on Non-routine Jobs	7,437 per non-routine job	0	0
Total Cost			1,332

A routine 1,000-square-foot asbestos removal job will cost $1,332.

Average per thousand square feet is = 1,332/1 = 1,332

b. A routine 2,000-square-foot asbestos removal job.

Activity Cost Pool	Activity Rate (a)	Activity Quantity (b)	Cost Allocated (a)*(b)
Removing Asbestos	1003 per thousand square foot	2	2,006
Estimating and Job Setup	329 per job	1	329
Working on Non-routine Jobs	7,437 per non-routine job	0	0
Total Cost			2,335

A routine 2,000-square-foot asbestos removal job will cost $2,335.

Average per thousand square feet is = 2335/2 = 1,167.5

c. A nonroutine 2,000-square-foot asbestos removal job.

Activity Cost Pool	Activity Rate (a)	Activity Quantity (b)	Cost Allocated (a)*(b)
Removing Asbestos	1003 per thousand square foot	2	2,006
Estimating and Job Setup	329 per job	1	329
Working on Non-routine Jobs	7,437 per non-routine job	1	7,437
Total Cost			9,772

A nonroutine 2,000-square-foot asbestos removal job will cost $9,772

Average per thousand square feet is = 9,772/2 = 4,886.0