Problem 7-18 Activity-Based Costing and Bidding on Jobs [LO7-2,LO7-3, LO7-4]
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 $2.80 to determine the bid price.Since our average cost is only $2.575 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 | 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 capacitycosts) | None | |
| Note: The 100 nonroutine jobs are included in thetotal of 400 jobs. Both nonroutine jobs and routine jobs requireestimating and setup. |
|
| Costs for the Year | | |
| Wages and salaries | $ | 372,000 |
| Disposal fees | | 775,000 |
| Equipment depreciation | | 96,000 |
| On-site supplies | | 58,000 |
| Office expenses | | 280,000 |
| Licensing and insurance | | 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 and salaries | 60 | % | | 10 | % | | 20 | % | | 10 | % | 100 | % |
| Disposal fees | 60 | % | | 0 | % | | 40 | % | | 0 | % | 100 | % |
| Equipment depreciation | 50 | % | | 10 | % | | 15 | % | | 25 | % | 100 | % |
| On-site supplies | 70 | % | | 20 | % | | 10 | % | | 0 | % | 100 | % |
| Office expenses | 10 | % | | 40 | % | | 20 | % | | 30 | % | 100 | % |
| Licensing and insurance | 25 | % | | 0 | % | | 60 | % | | 15 | % | 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.
