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.

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 $3.10 to determine the bid price. Since our average cost is only $2.855 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.”

 

Costs for the Year
Wages and salaries	$	450,000
Disposal fees		820,000
Equipment depreciation		110,000
On-site supplies		65,000
Office expenses		350,000
Licensing and insurance		550,000
Total cost	$	2,345,000

Distribution of Resource Consumption Across Activities
	Removing Asbestos			Estimating and Job Setup			Working on Nonroutine Jobs			Other		Total
Wages and salaries	60	%		10	%		20	%		10	%	100	%
Disposal fees	60	%		0	%		40	%		0	%	100	%
Equipment depreciation	40	%		5	%		25	%		30	%	100	%
On-site supplies	70	%		20	%		10	%		0	%	100	%
Office expenses	10	%		40	%		15	%		35	%	100	%
Licensing and insurance	25	%		0	%		60	%		15	%	100	%

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.

 

Explanation

1.

Wages and salaries:

Removing asbestos = 60% × $450,000 = $270,000

Estimating and Job Setup = 10% × $450,000 = $45,000

Working on Nonroutine Jobs = 20% × $450,000 = $90,000

Other = 10% × $450,000 = 45,000

Disposal fees:

Removing asbestos = 60% × $820,000 = $492,000

Estimating and Job Setup = 0% × $820,000 = $0

Working on Nonroutine Jobs = 40% × $820,000 = $328,000

Other = 0% × $820,000 = $0

Equipment depreciation:

Removing asbestos = 40% × $110,000 = $44,000

Estimating and Job Setup = 5% × $110,000 = $5,500

Working on Nonroutine Jobs = 25% × $110,000 = $27,500

Other = 30% × $110,000 = $33,000

On-site supplies:

Removing asbestos = 70% × $65,000 = $45,500

Estimating and Job Setup = 20% × $65,000 = $13,000

Working on Nonroutine Jobs = 10% × $65,000 = $6,500

Other = 0% × $65,000 = $0

Office expenses:

Removing asbestos = 10% × $350,000 = $35,000

Estimating and Job Setup = 40% × $350,000 = $140,000

Working on Nonroutine Jobs = 15% × $350,000 = $52,500

Other = 35% × $350,000 = $122,500

Licensing and insurance:

Removing asbestos = 25% × $550,000 = $137,500

Estimating and Job Setup = 0% × $550,000 = $0

Working on Nonroutine Jobs = 60% × $550,000 = $330,000

Other = 15% × $550,000 = $82,500

3.

The costs of each of the jobs can be computed as follows using the activity rates computed above:

a.

Routine one thousand square foot job:

 

Job size (1 thousand square feet @ $1,280 per thousand square feet)	$	1,280.00
Estimating and job setup (1 job @ $407 per job)		407.00
Nonroutine job (not applicable)		0
Total cost of the job	$	1,687.00
Cost per thousand square feet ($1,687 ÷ 1 thousand square feet)	$	1,687.00

b.

Routine two thousand square foot job:

Job size (2 thousand square feet @ $1,280 per thousand square feet)	$	2,560.00
Estimating and job setup (1 job @ $407 per job)		407.00
Nonroutine job (not applicable)		0
Total cost of the job	$	2,967.00
Cost per thousand square feet ($2,967 ÷ 2 thousand square feet)	$	1,483.50

c.

Nonroutine two thousand square foot job:

Job size (2 thousand square feet @ $1,280 per thousand square feet)	$	2,560.00
Estimating and job setup (1 job @ $407 per job)		407.00
Nonroutine job		8,345.00
Total cost of the job	$	11,312.00
Cost per thousand square feet ($11,312 ÷ 2 thousand square feet)	$	5,656.00

 

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