Mercer Asbestos Removal Company removes potentially toxicasbestos insulation and related products from buildings. There hasbeen a long-simmering dispute between the companyâs estimator andthe work supervisors. The on-site supervisors claim that theestimators do not adequately distinguish between routine work suchas removal of asbestos insulation around heating pipes in olderhomes and nonroutine work such as removing asbestos-contaminatedceiling plaster in industrial buildings. The on-site supervisorsbelieve that nonroutine work is far more expensive than routinework and should bear higher customer charges. The estimator sums uphis position in this way: âMy job is to measure the area to becleared of asbestos. As directed by top management, I simplymultiply the square footage by $2.80 to determine the bid price.Since our average cost is only $2.58 per square foot, that leavesenough cushion to take care of the additional costs of nonroutinework that shows up. Besides, it is difficult to know what isroutine or not routine until you actually start tearing thingsapart.â
To shed light on this controversy,the company initiated an activity-based costing study of all of itscosts. Data from the activity-based costing system follow:
Activity Cost Pool ActivityMeasure Total Activity Removingasbestos Thousands of square feet 800 thousandsquare feet Estimating and jobsetup Number of jobs 400 jobs Working onnonroutine jobs Number of nonroutine jobs 100 nonroutine jobs Other (costs of idlecapacity and
organization-sustaining costs) None
Note: The 100 nonroutine jobs are included in the total of 400jobs. Both nonroutine jobs and routine jobs require estimating andsetup.
Costs for theYear Wages andsalaries $ 372,000 Disposal fees 775,000 Equipmentdepreciation 96,000 On-sitesupplies 58,000 Office expenses 280,000 Licensing andinsurance 480,000 Total cost $ 2,061,000
Distribution of Resource Consumption AcrossActivities
Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total Wages andsalaries 60 % 10 % 20 % 10 % 100 % Disposal fees 60 % 0 % 40 % 0 % 100 % Equipmentdepreciation 50 % 10 % 15 % 25 % 100 % On-sitesupplies 70 % 20 % 10 % 0 % 100 % Office expenses 10 % 40 % 20 % 30 % 100 % Licensing andinsurance 25 % 0 % 60 % 15 % 100 %
Required:
3. Using the activity rates you have computed, determine the totalcost and the average cost per thousand square feet of each of thefollowing jobs according to the activity-based costing system.
Mercer Asbestos Removal Company removes potentially toxicasbestos insulation and related products from buildings. There hasbeen a long-simmering dispute between the companyâs estimator andthe work supervisors. The on-site supervisors claim that theestimators do not adequately distinguish between routine work suchas removal of asbestos insulation around heating pipes in olderhomes and nonroutine work such as removing asbestos-contaminatedceiling plaster in industrial buildings. The on-site supervisorsbelieve that nonroutine work is far more expensive than routinework and should bear higher customer charges. The estimator sums uphis position in this way: âMy job is to measure the area to becleared of asbestos. As directed by top management, I simplymultiply the square footage by $2.80 to determine the bid price.Since our average cost is only $2.58 per square foot, that leavesenough cushion to take care of the additional costs of nonroutinework that shows up. Besides, it is difficult to know what isroutine or not routine until you actually start tearing thingsapart.â |
To shed light on this controversy,the company initiated an activity-based costing study of all of itscosts. Data from the activity-based costing system follow: |
Activity Cost Pool | ActivityMeasure | Total Activity | |
Removingasbestos | Thousands of square feet | 800 | thousandsquare feet |
Estimating and jobsetup | Number of jobs | 400 | jobs |
Working onnonroutine jobs | Number of nonroutine jobs | 100 | nonroutine jobs |
Other (costs of idlecapacity and organization-sustaining costs) | None | ||
Note: The 100 nonroutine jobs are included in the total of 400jobs. Both nonroutine jobs and routine jobs require estimating andsetup. |
Costs for theYear | ||
Wages andsalaries | $ | 372,000 |
Disposal fees | 775,000 | |
Equipmentdepreciation | 96,000 | |
On-sitesupplies | 58,000 | |
Office expenses | 280,000 | |
Licensing andinsurance | 480,000 | |
Total cost | $ | 2,061,000 |
Distribution of Resource Consumption AcrossActivities |
Removing Asbestos | Estimating and Job Setup | Working on Nonroutine Jobs | Other | Total | ||||||
Wages andsalaries | 60 | % | 10 | % | 20 | % | 10 | % | 100 | % |
Disposal fees | 60 | % | 0 | % | 40 | % | 0 | % | 100 | % |
Equipmentdepreciation | 50 | % | 10 | % | 15 | % | 25 | % | 100 | % |
On-sitesupplies | 70 | % | 20 | % | 10 | % | 0 | % | 100 | % |
Office expenses | 10 | % | 40 | % | 20 | % | 30 | % | 100 | % |
Licensing andinsurance | 25 | % | 0 | % | 60 | % | 15 | % | 100 | % |
Required: |
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