Problem 718 ActlvityBased Costing and Bldding on Jobs LO72 L

Problem 7-18 Actlvity-Based Costing and Bldding on Jobs [LO7-2, LO7-3, LO7-4] 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 as 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 $2435 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 nated ceiling 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 MeasureTotal Activi Activity Cost Pool Removing asbestos Estinating and job setup Working on nonroutine jobs Other (organization-sustaining costs 1,8e0 thousand square feet Thousands of square feet Number of jobs Number of nonroutine jobs 5ee jobs 18e nonroutine jobs and idle capacity costs) one Note: The 1ee nonroutine jobs are included in the total of see jobs. Both nonrout ine jobs and routine jobs require estinating and setup. Costs for the Year Hages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost 486 , ??? 793,880 96,888 58,ee0 288,880 582,804 2,135,8ee $ stribution of Resource Consumption Across Activities Estimating Working on Renoving and Job Nonroutine Jobs Asbestos 68% Setup 1e3 18% e% Hages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance 28% 18% 25% 5e% 1ee 198% ee% 100% 4e% 7ex 0% 20 35 ??% 1eex 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 foliowing 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.

Solution

1. First -stage allocation of costs to activity cost pools :

2. Computation of activity rates:

3. a.

b.

c.

Number of sq. ft.

	Removing Asbestos	Estimating and Job Setup	Working on Non Routine Jobs	Other	Total
Wages and Salaries	243,600	40,600	81,200	40,600	406,000
Disposal Fees	475,800	0	317,200	0	793,000
Equipment Depreciation	38,400	4,800	19,200	33,600	96,000
On-site Supplies	40,600	11,600	5,800	0	58,000
Office Expenses	28,000	98,000	70,000	84,000	280,000
Licenses and Insurance	150,600	0	251,000	100,400	502,000
Totals	977,000	155,000	744,400	258,600	2,135,000