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 $2.80 to determine the bid price. Since our average cost is only $2.58 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 850 thousand squarefeet Estimating and job setup Number of jobs 400 jobs Working on nonroutine jobs Number of nonroutine jobs 100 nonroutine jobs Other (costs of idle capacity andorganization-sustaining costs) None Note: The 100 nonroutine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Costs for the Year Wages and salaries $ 400,000 Disposal fees 791,000 Equipment depreciation 96,000 On-site supplies 60,000 Office expenses 300,000 Licensing and insurance 500,000 Total cost $ 2,147,000 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 60 % 25 % 15 % 0 % 100 % Office expenses 10 % 35 % 25 % 30 % 100 % Licensing and insurance 30 % 0 % 50 % 20 % 100 % Required: 1. Perform the first-stage allocation of costs to the activity cost pools. Removing Estimating and Working on Asbestos Job Setup 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. (Round the "Average cost" to 2 decimal places.) a. A routine 1,000-square-foot asbestos removal job. Total cost of the job Average cost per thousand square feet b. A routine 2,000-square-foot asbestos removal job. Total cost of the job Average cost per thousand square feet c. A nonroutine 2,000-square-foot asbestos removal job. Total cost of the job Average cost per thousand square feet

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 $2.80 to determine the bid price. Since our average cost is only $2.58 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 850 thousand squarefeet Estimating and job setup Number of jobs 400 jobs Working on nonroutine jobs Number of nonroutine jobs 100 nonroutine jobs Other (costs of idle capacity andorganization-sustaining costs) None Note: The 100 nonroutine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Costs for the Year Wages and salaries $ 400,000 Disposal fees 791,000 Equipment depreciation 96,000 On-site supplies 60,000 Office expenses 300,000 Licensing and insurance 500,000 Total cost $ 2,147,000 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 60 % 25 % 15 % 0 % 100 % Office expenses 10 % 35 % 25 % 30 % 100 % Licensing and insurance 30 % 0 % 50 % 20 % 100 % Required: 1. Perform the first-stage allocation of costs to the activity cost pools. Removing Estimating and Working on Asbestos Job Setup 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. (Round the "Average cost" to 2 decimal places.) a. A routine 1,000-square-foot asbestos removal job. Total cost of the job Average cost per thousand square feet b. A routine 2,000-square-foot asbestos removal job. Total cost of the job Average cost per thousand square feet c. A nonroutine 2,000-square-foot asbestos removal job. Total cost of the job Average cost per thousand square feet

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

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		850	thousand squarefeet
Estimating and job setup	Number of jobs		400	jobs
Working on nonroutine jobs	Number of nonroutine jobs		100	nonroutine jobs
Other (costs of idle capacity and organization-sustaining costs)	None

Note: The 100 nonroutine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.

Costs for the Year
Wages and salaries	$	400,000
Disposal fees		791,000
Equipment depreciation		96,000
On-site supplies		60,000
Office expenses		300,000
Licensing and insurance		500,000
Total cost	$	2,147,000

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		60	%			25	%	15	%	0	%	100	%
Office expenses		10	%			35	%	25	%	30	%	100	%
Licensing and insurance		30	%			0	%	50	%	20	%	100	%

Required:

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

	Removing	Estimating and	Working on
	Asbestos	Job Setup	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. (Round the "Average cost" to 2 decimal places.)

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


Total cost of the job
Average cost per thousand square feet

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


Total cost of the job
Average cost per thousand square feet

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


Total cost of the job
Average cost per thousand square feet

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