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 $2.585 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 Removing asbestos Estimating and job setup Working on nonroutine jobs Other (organization-sustaining Activity Measure Thousands of square feet Number of jobs Number of nonroutine jobs Costs for the Year Total Activity 850 thousand square feet 400 jobs 100 non routine jobs None costs and idle capacity costs) Note: The 100 non routine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.
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 $2.585 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 Removing asbestos Estimating and job setup Working on nonroutine jobs Other (organization-sustaining Activity Measure Thousands of square feet Number of jobs Number of nonroutine jobs Costs for the Year Total Activity 850 thousand square feet 400 jobs 100 non routine jobs None costs and idle capacity costs) Note: The 100 non routine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text: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.
Complete this question by entering your answers in the tabs below.
Req 1
Req 2 Req 3A to 3C
Perform the first-stage allocation of costs to the activity cost pools.
Estimating
and Job
Setup
Working on
Nonroutine
Jobs
Wages and salaries
Disposal fees
Equipment depreciation
On-site supplies
Office expenses
Licensing and insurance
Total cost
Removing
asbestos
< Req 1
Other
Req 2 >
Total
Transcribed Image Text: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 $2.585 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
Removing asbestos
Estimating and job setup
Working on nonroutine jobs
Other (organization-sustaining
Costs for the Year
Wages and salaries
Disposal fees
Equipment depreciation
None
costs and idle capacity costs)
Note: The 100 non routine jobs are included in the total of 400 jobs. Both nonroutine jobs and
routine jobs require estimating and setup.
On-site supplies
Office expenses
Licensing and insurance
Total cost
Wages and salaries
Disposal fees
Equipment depreciation
Activity Measure
Thousands of square feet
Number of jobs
Number of nonroutine jobs
On-site supplies
Office expenses
Licensing and insurance
$ 400,000
791,000
96,000
60,000
Distribution of Resource Consumption Across Activities
300,000
500,000
$2,147,000
Removing
Asbestos
60%
60%
40%
60%
18%
30%
Estimating Working on
and Job Nonroutine
Jobs
20%
40%
25%
15%
25%
50%
Setup
10%
Total Activity
850 thousand square feet
400 jobs
100 nonroutine jobs
5%
25%
35%
8%
Other
10%
30%
8%
30%
20%
Total
100%
100%
100%
100%
100%
100%
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