Mercer Asbestos Removal Company removes potentially toxicasbestos insulation and related products from buildings. There hasbeen a long-simmering dispute between the company’s 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: “My job is to measure the area to becleared of asbestos. As directed by top management, I simplymultiply the square footage by $2.50 to determine the bid price.Since our average cost is only $2.01 per square foot, that leavesenough cushion to take care of the additional costs of nonroutinework that shows up. Besides, it is difficult to know what isroutine or not routine until you actually start tearing thingsapart.” To shed light on this controversy, the company initiated anactivity-based costing study of all of its costs. Data from theactivity-based costing system follow: Activity Cost Pool ActivityMeasure Total Activity Removing asbestos Thousands of square feet850 thousand square feet Estimating and job setup Number of jobs400 jobs Working on nonroutine jobs Number of nonroutine jobs 100nonroutine jobs Other (organization-sustaining costs and idlecapacity costs) None Note: The 100 nonroutine jobs are included inthe total of 400 jobs. Both nonroutine jobs and routine jobsrequire estimating and setup. Costs for the Year Wages and salaries$ 308,000 Disposal fees 706,000 Equipment depreciation 90,000On-site supplies 50,000 Office expenses 210,000 Licensing andinsurance 410,000 Total cost $ 1,774,000 Distribution of ResourceConsumption Across Activities Removing Asbestos Estimating and JobSetup Working on Nonroutine Jobs Other Total Wages and salaries 60% 10 % 20 % 10 % 100 % Disposal fees 70 % 0 % 30 % 0 % 100 %Equipment depreciation 40 % 5 % 25 % 30 % 100 % On-site supplies 70% 20 % 10 % 0 % 100 % Office expenses 15 % 35 % 20 % 30 % 100 %Licensing and insurance 25 % 0 % 50 % 25 % 100 % Required: 1.Perform the first-stage allocation of costs to the activity costpools. 2. Compute the activity rates for the activity cost pools.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. a. Aroutine 1,000-square-foot asbestos removal job. b. A routine2,000-square-foot asbestos removal job. c. A nonroutine2,000-square-foot asbestos removal job.
