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 $3.60 to determine the bid price. Since our average cost is only $2.775 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 800 thousand square feet Estimating and job setup Number of jobs 400 jobs Working on nonroutine jobs Number of nonroutine jobs 100 nonroutine jobs Other (organization-sustaining costs and idle capacity 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 $ 480,000 Disposal fees 882,000 Equipment depreciation 108,000 On-site supplies 68,000 Office expenses 380,000 Licensing and insurance 580,000 Total cost $ 2,498,000 Distribution of Resource Consumption Across Activities Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total Wages and salaries 50% 15% 20% 15% 100% Disposal fees 70% 0% 30% 0% 100% Equipment depreciation 40% 5% 20% 35% 100% On-site supplies 70% 20% 10% 0% 100% Office expenses 15% 35% 20% 30% 100% Licensing and insurance 30% 0% 50% 20% 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.

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 $3.60 to determine the bid price. Since our average cost is only $2.775 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 800 thousand square feet Estimating and job setup Number of jobs 400 jobs Working on nonroutine jobs Number of nonroutine jobs 100 nonroutine jobs Other (organization-sustaining costs and idle capacity 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 $ 480,000 Disposal fees 882,000 Equipment depreciation 108,000 On-site supplies 68,000 Office expenses 380,000 Licensing and insurance 580,000 Total cost $ 2,498,000 Distribution of Resource Consumption Across Activities Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total Wages and salaries 50% 15% 20% 15% 100% Disposal fees 70% 0% 30% 0% 100% Equipment depreciation 40% 5% 20% 35% 100% On-site supplies 70% 20% 10% 0% 100% Office expenses 15% 35% 20% 30% 100% Licensing and insurance 30% 0% 50% 20% 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.

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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Problem 7-18 (Algo) Activity-Based Costing and Bidding on Jobs [LO7-2, LO7-3, LO7-4]

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	800	thousand square feet
Estimating and job setup	Number of jobs	400	jobs
Working on nonroutine jobs	Number of nonroutine jobs	100	nonroutine jobs
Other (organization-sustaining costs and idle capacity 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	$ 480,000
Disposal fees	882,000
Equipment depreciation	108,000
On-site supplies	68,000
Office expenses	380,000
Licensing and insurance	580,000
Total cost	$ 2,498,000

	Removing Asbestos	Estimating and Job Setup	Working on Nonroutine Jobs	Other	Total
Distribution of Resource Consumption Across Activities
Wages and salaries	50%	15%	20%	15%	100%
Disposal fees	70%	0%	30%	0%	100%
Equipment depreciation	40%	5%	20%	35%	100%
On-site supplies	70%	20%	10%	0%	100%
Office expenses	15%	35%	20%	30%	100%
Licensing and insurance	30%	0%	50%	20%	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.

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 $3.60 to determine the bid price. Since our average cost is only $2.775 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 and
idle capacity costs)
Activity Measure
Total Activity
Thousands of square feet
Number of jobs
Number of nonroutine jobs
800 thousand square feet
400 jobs
100 nonroutine jobs
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
$ 480,000
Wages and salaries
Disposal fees
Equipment depreciation
On-site supplies
Office expenses
882,000
108,000
68,000
380,000
Licensing and insurance
580,000
Total cost
$ 2,498,000
Distribution of Resource Consumption Across Activities
Estimating Working on
Removing
and Job
Nonroutine
Asbestos
Setup
Jobs
Other
Total
Wages and salaries
Disposal fees
Equipment depreciation
On-site supplies
Office expenses
50%
15%
20%
15%
100%
70%
0%
30%
0%
100%
40%
5%
20%
35%
100%
70%
20%
10%
0%
100%
15%
35%
20%
30%
100%
Licensing and insurance
30%
0%
50%
20%
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.

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