PROBLEM 7-18 Activity-Based Costing and Bidding on Jobs (L07-2, L07-3, L07-4] 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 estima- tor 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 $2.50 to determine the bid price. Since our average cost is only $2.175 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 ............ Estimating and job setup......... Working on nonroutine jobs ..... Other (costs of idle capacity and organization-sustaining costs) ... Thousands of square feet Number of jobs Number of nonroutine jobs 800 thousand square feet 500 jobs 100 nonroutine jobs 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 ........ Disposal fees ...... Equipment depreciation On-site supplies ..... Office expenses ...... Licensing and insurance. Total cost ................ $ 300,000 700,000 90,000 50,000 200,000 400,000 $1,740,000 Working on Nonroutine Jobs Other Total Distribution of Resource Consumption Across Activities Estimating Removing and Job Asbestos Setup Wages and salaries ....... 50% 10% Disposal fees ............ 60% 0% Equipment depreciation ... 40% 5% On-site supplies ......... 60% 30% Office expenses ......... 10% 35% 30% 40% 188200 20% 10% 0% 35% 0% 30% 100% 100% 100% 100% 100% 10% 25% Licensing and insurance ... 30% 0% 50% 20% 100% Required: 1. Using Exhibit 7-6 as a guide, perform the first stage allocation of costs to the activity cost pools. 2. Using Exhibit 7-7 as a guide, 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. 4. Given the results you obtained in (3) above, do you agree with the estimator that the com- pany's present policy for bidding on jobs is adequate?
Related questions
Mercer Asbestos Removal Company removes potentially toxicasbestos insulation and related products from buildings. There hasbeen a long-simmering dispute between the companyâs estimator andthe work supervisors. The on-site supervisors claim that theestimators do not adequately distinguish between routine work, suchas removal of asbestos insulation around heating pipes in olderhomes, and nonroutine work, such as removing asbestos-contaminatedceiling plaster in industrial buildings. The on-site supervisorsbelieve that nonroutine work is far more expensive than routinework and should bear higher customer charges. The estimator sums uphis position in this way: âMy job is to measure the area to becleared of asbestos. As directed by top management, I simplymultiply the square footage by $3.20 to determine the bid price.Since our average cost is only $2.745 per square foot, that leavesenough cushion to take care of the additional costs of nonroutinework that shows up. Besides, it is difficult to know what isroutine or not routine until you actually start tearing thingsapart.â
To shed light on this controversy, the company initiated anactivity-based costing study of all of its costs. Data from theactivity-based costing system follow:
| Activity Cost Pool | ActivityMeasure | 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-sustainingcosts and idle capacity costs) | None | ||
| Note: The 100nonroutine jobs are included in the total of 500 jobs. Bothnonroutine jobs and routine jobs require estimating and setup. | |||
| Costs for the Year | ||
| Wages and salaries | $ | 470,000 |
| Disposal fees | 801,000 | |
| Equipment depreciation | 110,000 | |
| On-site supplies | 68,000 | |
| Office expenses | 370,000 | |
| Licensing and insurance | 570,000 | |
| Total cost | $ | 2,389,000 |
| Distribution ofResource 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 | 50 | % | 10 | % | 15 | % | 25 | % | 100 | % | ||||||
| On-site supplies | 60 | % | 25 | % | 15 | % | 0 | % | 100 | % | ||||||
| Office expenses | 10 | % | 40 | % | 15 | % | 35 | % | 100 | % | ||||||
| Licensing and insurance | 30 | % | 0 | % | 50 | % | 20 | % | 100 | % | ||||||
Required:
1. Perform the first-stage allocation of costs to the activitycost pools.
2. Compute the activity rates for the activity cost pools.
3. Using the activity rates you have computed, determine thetotal cost and the average cost per thousand square feet of each ofthe following jobs according to the activity-based costingsystem.
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.
Denny Asbestos Removal Company removes potentially toxicasbestos insulation and related products from buildings. Thecompanyâs estimator has been involved in a long-simmering disputewith the on-site work supervisors. The on-site supervisors claimthat the estimator does not adequately distinguish between routinework such as removal of asbestos insulation around heating pipes inolder homes and nonroutine work such as removingasbestos-contaminated ceiling plaster in industrial buildings. Theon-site supervisors believe that nonroutine work is far moreexpensive than routine work and should bear higher customercharges. The estimator sums up his position in this way: âMy job isto measure the area to be cleared of asbestos. As directed by topmanagement, I simply multiply the square footage by $6,000 perthousand square feet to determine the bid price. Since our averagecost is only $3,000 per thousand square feet, that leaves enoughcushion to take care of the additional costs of nonroutine workthat shows up. Besides, it is difficult to know what is routine ornonroutine until you actually start tearing things apart.â
To shed light on this controversy,the company initiated an activity-based costing study of all of itscosts. Data from the activity-based costing system follow: |
| Activity Cost Pool | ActivityMeasure | Total Activity | |
| Removing asbestos | Thousands ofsquare feet | 520 | thousandsquare feet |
| Estimating and job setup | Number ofjobs | 160 | jobs* |
| Working on nonroutine jobs | Number ofnonroutine jobs | 28 | nonroutinejobs |
| Other (organization-sustaining and idle capacity costs) | None | Not applicable | |
* The total number of jobs includes nonroutine jobs as well asroutine jobs. Nonroutine jobs as well as routine jobs requireestimating and setup work. |
| Costs for the Year | ||
| Wages and salaries | $ | 207,000 |
| Disposal fees | 608,000 | |
| Equipment depreciation | 16,000 | |
| On-site supplies | 59,000 | |
| Office expenses | 187,000 | |
| Licensing and insurance | 372,000 | |
| Total cost | $ | 1,449,000 |
Distribution of Resource Consumption Across Activities | ||||||
| Removing Asbestos | Estimating and Job Setup | Working on Nonroutine Jobs | Other | Total | ||||||
| Wages and salaries | 33 | % | 12 | % | 31 | % | 24 | % | 100 | % |
| Disposal fees | 73 | % | 0 | % | 27 | % | 0 | % | 100 | % |
| Equipment depreciation | 43 | % | 0 | % | 37 | % | 20 | % | 100 | % |
| On-site supplies | 52 | % | 11 | % | 18 | % | 19 | % | 100 | % |
| Office expenses | 7 | % | 36 | % | 27 | % | 30 | % | 100 | % |
| Licensing and insurance | 41 | % | 0 | % | 32 | % | 27 | % | 100 | % |
| Required: |
| 1. | Perform the first-stage allocation of costs to the activity costpools. |
| 2. | Compute theactivity rates for the activity cost pools. (Round youranswers to 2 decimal places.) |
| 3. | Using the activity rates you have computed, determine the totalcost and the average cost per thousand square feet of each of thefollowing jobs according to the activity-based costing system.(Round your intermediate and final answers to 2 decimalplaces.) |
| a. | A routine4,000-square-foot asbestos removal job. | |
| b. | A routine6,000-square-foot asbestos removal job. |
| c. | A nonroutine4,000-square-foot asbestos removal job. |
Mercer Asbestos Removal Company removes potentially toxicasbestos insulation and related products from buildings. There hasbeen a long-simmering dispute between the companyâs estimator andthe work supervisors. The on-site supervisors claim that theestimators do not adequately distinguish between routine work suchas removal of asbestos insulation around heating pipes in olderhomes and nonroutine work such as removing asbestos-contaminatedceiling plaster in industrial buildings. The on-site supervisorsbelieve that nonroutine work is far more expensive than routinework and should bear higher customer charges. The estimator sums uphis position in this way: âMy job is to measure the area to becleared of asbestos. As directed by top management, I simplymultiply the square footage by $2.80 to determine the bid price.Since our average cost is only $2.58 per square foot, that leavesenough cushion to take care of the additional costs of nonroutinework that shows up. Besides, it is difficult to know what isroutine or not routine until you actually start tearing thingsapart.â |
To shed light on this controversy,the company initiated an activity-based costing study of all of itscosts. Data from the activity-based costing system follow: |
| Activity Cost Pool | ActivityMeasure | Total Activity | |
| Removingasbestos | Thousands of square feet | 800 | thousandsquare feet |
| Estimating and jobsetup | Number of jobs | 400 | jobs |
| Working onnonroutine jobs | Number of nonroutine jobs | 100 | nonroutine jobs |
| Other (costs of idlecapacity and organization-sustaining costs) | None | ||
Note: The 100 nonroutine jobs are included in the total of 400jobs. Both nonroutine jobs and routine jobs require estimating andsetup. |
| Costs for theYear | ||
| Wages andsalaries | $ | 372,000 |
| Disposal fees | 775,000 | |
| Equipmentdepreciation | 96,000 | |
| On-sitesupplies | 58,000 | |
| Office expenses | 280,000 | |
| Licensing andinsurance | 480,000 | |
| Total cost | $ | 2,061,000 |
| Distribution of Resource Consumption AcrossActivities |
| Removing Asbestos | Estimating and Job Setup | Working on Nonroutine Jobs | Other | Total | ||||||
| Wages andsalaries | 60 | % | 10 | % | 20 | % | 10 | % | 100 | % |
| Disposal fees | 60 | % | 0 | % | 40 | % | 0 | % | 100 | % |
| Equipmentdepreciation | 50 | % | 10 | % | 15 | % | 25 | % | 100 | % |
| On-sitesupplies | 70 | % | 20 | % | 10 | % | 0 | % | 100 | % |
| Office expenses | 10 | % | 40 | % | 20 | % | 30 | % | 100 | % |
| Licensing andinsurance | 25 | % | 0 | % | 60 | % | 15 | % | 100 | % |
| Required: |
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