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 $2.845 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 750 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 $ 460,000 Disposal fees 862,000 Equipment depreciation 104,000 On-site supplies 66,000 Office expenses 360,000 Licensing and insurance 560,000 Total cost $ 2,412,000 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 50 % 10 % 15 % 25 % 100 % On-site supplies 60 % 30 % 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. 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 $2.845 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 750 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 $ 460,000 Disposal fees 862,000 Equipment depreciation 104,000 On-site supplies 66,000 Office expenses 360,000 Licensing and insurance 560,000 Total cost $ 2,412,000 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 50 % 10 % 15 % 25 % 100 % On-site supplies 60 % 30 % 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. 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

See similar textbooks

Expert Answer

thumb_up

thumb_down

Step 1

Given :

Costs for the Year
Wages and salaries	$	460,000
Disposal fees		862,000
Equipment depreciation		104,000
On-site supplies		66,000
Office expenses		360,000
Licensing and insurance		560,000
Total cost	$	2,412,000

Activity Cost Pool	Activity Measure	Total Activity
Removing asbestos	Thousands of square feet	750	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

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

Step 2

(1).

The first stage allocation of costs to the activity cost pools is shown below :

Description	Removing asbestos	Estimating & job setup	Working on nonroutine jobs	Other	Total
Wages and salaries	(230,000) 460,000 * 50%	69,000	92,000	69,000	460,000
Disposal fees	(603,400) 862,000 * 70%	-	258,600	-	862,000
Equipment depreciation	(52,000) 104,000 * 50%	10,400	15,600	26,000	104,000
On-site suppliers	(39,600) 66,000 * 60%	19,800	6,600	-	66,000
Office expenses	(54,000) 360,000 * 15%	126,000	72,000	108,000	360,000
Licensing and insurance	(140,000) 560,000 * 25%	-	336,000	84,000	560,000
Total cost	1,119,000	225,200	780,800	287,000	2,412,000

Step 3

(2).

The activity rates for the activity cost pools are calculated below :

Activity cost pool	Total cost (1)	Total activity (2)	Activity rates (1/2)
Removing asbestos	1,119,000	750 thousand square feet	1,492
Estimating & job setup	225,200	400 jobs	563
Working on non-routine jobs	780,800	100 nonroutine jobs	7808

Step 4

Since you have posted a question with multiple sub-parts, we will solve the first two subparts for you due to lack of time. To get the remaining sub-part solved please repost the complete question and mention the sub-parts to be solved.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Activity Cost Pool	Activity Measure	Total Activity
Removing asbestos	Thousands of square feet	750	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	$	460,000
Disposal fees		862,000
Equipment depreciation		104,000
On-site supplies		66,000
Office expenses		360,000
Licensing and insurance		560,000
Total cost	$	2,412,000

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