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 $2.70 to determine the bid price. Since our average cost is only $2.405 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 500 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 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Costs for the Year Wages and salaries $ 323,000 Disposal fees 759,000 Equipment depreciation 90,000 On-site supplies 56,000 Office expenses 250,000 Licensing and insurance 450,000 Total cost $ 1,928,000 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% 20% 35% 100% On-site supplies 70% 20% 10% 0% 100% Office expenses 15% 35% 20% 30% 100% Licensing and insurance 25% 0% 60% 15% 100% Required: 1. Perform the first-stage allocation of costs to the activity cost pools.

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 $2.70 to determine the bid price. Since our average cost is only $2.405 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 500 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 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Costs for the Year Wages and salaries $ 323,000 Disposal fees 759,000 Equipment depreciation 90,000 On-site supplies 56,000 Office expenses 250,000 Licensing and insurance 450,000 Total cost $ 1,928,000 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% 20% 35% 100% On-site supplies 70% 20% 10% 0% 100% Office expenses 15% 35% 20% 30% 100% Licensing and insurance 25% 0% 60% 15% 100% Required: 1. Perform the first-stage allocation of costs to the activity cost pools.

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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Activity Cost Pool	Activity Measure	Total Activity
Removing asbestos	Thousands of square feet	800	thousand square feet
Estimating and job setup	Number of jobs	500	jobs
Working on nonroutine jobs	Number of nonroutine jobs	100	nonroutine jobs
Other (organization-sustaining costs and idle capacity costs)	None

Costs for the Year
Wages and salaries	$ 323,000
Disposal fees	759,000
Equipment depreciation	90,000
On-site supplies	56,000
Office expenses	250,000
Licensing and insurance	450,000
Total cost	$ 1,928,000

	Removing Asbestos	Estimating and Job Setup	Working on Nonroutine Jobs	Other	Total
Distribution of Resource Consumption Across Activities
Wages and salaries	60%	10%	20%	10%	100%
Disposal fees	60%	0%	40%	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	25%	0%	60%	15%	100%