Question
Mercer Asbestos Removal Company removes potentially toxic asbestos insulation from buildings. There has been a long-simmering dispute between the company’s estimator and the work supervisors. The on-site supervisors claim the estimators do not adequately distinguish between routine work, such as removing 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 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. Because our average cost is only $2.175 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work. 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 gathered the following activity-based costing data:
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 $ 300,000
Disposal fees 700,000
Equipment depreciation 90,000
On-site supplies 50,000
Office expenses 200,000
Licensing and insurance 400,000
Total cost $ 1,740,000
Distribution of Resource Consumption Across Activities
Removing Asbestos/ Estimating and Job Setup/ Working on Nonroutine Jobs/ Other/ Total
Wages and salaries 50%/ 10%/ 30%/ 10% /100%
Disposal fees 60%/ 0%/ 40%/ 0%/ 100%
Equipment depreciation 40%/ 5%/ 20%/ 35%/ 100%
On-site supplies 60%/ 30%/ 10%/ 0%/ 100%
Office expenses 10%/ 35%/ 25%/ 30%/ 100%
Licensing and insurance 30%/ 0%/ 50%/ 20%/ 100%
Required:
Perform the first-stage allocation of costs to the activity cost pools.
Compute the activity rates for the activity cost pools.
Calculate 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 routine 1,000-square-foot asbestos removal job.
A routine 2,000-square-foot asbestos removal job.
A nonroutine 2,000-square-foot asbestos removal job.
To shed light on this controversy, the company gathered the following activity-based costing data:
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 $ 300,000
Disposal fees 700,000
Equipment depreciation 90,000
On-site supplies 50,000
Office expenses 200,000
Licensing and insurance 400,000
Total cost $ 1,740,000
Distribution of Resource Consumption Across Activities
Removing Asbestos/ Estimating and Job Setup/ Working on Nonroutine Jobs/ Other/ Total
Wages and salaries 50%/ 10%/ 30%/ 10% /100%
Disposal fees 60%/ 0%/ 40%/ 0%/ 100%
Equipment depreciation 40%/ 5%/ 20%/ 35%/ 100%
On-site supplies 60%/ 30%/ 10%/ 0%/ 100%
Office expenses 10%/ 35%/ 25%/ 30%/ 100%
Licensing and insurance 30%/ 0%/ 50%/ 20%/ 100%
Required:
Perform the first-stage allocation of costs to the activity cost pools.
Compute the activity rates for the activity cost pools.
Calculate 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 routine 1,000-square-foot asbestos removal job.
A routine 2,000-square-foot asbestos removal job.
A nonroutine 2,000-square-foot asbestos removal job.
Answers
Answered by
GPT-4o mini
To tackle the problem, we will first allocate the costs to the activity cost pools, compute the activity rates for each cost pool, and finally calculate the total costs and average costs per thousand square feet for both routine and nonroutine jobs.
### **Step 1: First-stage Allocation of Costs to Activity Cost Pools**
We will allocate the total costs based on the distribution of resource consumption across activities.
1. **Wages and Salaries**
- Removing Asbestos: \(300,000 \times 50\% = 150,000\)
- Estimating and Job Setup: \(300,000 \times 10\% = 30,000\)
- Working on Nonroutine Jobs: \(300,000 \times 30\% = 90,000\)
- Other: \(300,000 \times 10\% = 30,000\)
2. **Disposal Fees**
- Removing Asbestos: \(700,000 \times 60\% = 420,000\)
- Estimating and Job Setup: \(700,000 \times 0\% = 0\)
- Working on Nonroutine Jobs: \(700,000 \times 40\% = 280,000\)
- Other: \(700,000 \times 0\% = 0\)
3. **Equipment Depreciation**
- Removing Asbestos: \(90,000 \times 40\% = 36,000\)
- Estimating and Job Setup: \(90,000 \times 5\% = 4,500\)
- Working on Nonroutine Jobs: \(90,000 \times 20\% = 18,000\)
- Other: \(90,000 \times 35\% = 31,500\)
4. **On-site Supplies**
- Removing Asbestos: \(50,000 \times 60\% = 30,000\)
- Estimating and Job Setup: \(50,000 \times 30\% = 15,000\)
- Working on Nonroutine Jobs: \(50,000 \times 10\% = 5,000\)
- Other: \(50,000 \times 0\% = 0\)
5. **Office Expenses**
- Removing Asbestos: \(200,000 \times 10\% = 20,000\)
- Estimating and Job Setup: \(200,000 \times 35\% = 70,000\)
- Working on Nonroutine Jobs: \(200,000 \times 25\% = 50,000\)
- Other: \(200,000 \times 30\% = 60,000\)
6. **Licensing and Insurance**
- Removing Asbestos: \(400,000 \times 30\% = 120,000\)
- Estimating and Job Setup: \(400,000 \times 0\% = 0\)
- Working on Nonroutine Jobs: \(400,000 \times 50\% = 200,000\)
- Other: \(400,000 \times 20\% = 80,000\)
Now, we sum the allocated costs for each activity cost pool:
| Cost Pool | Removing Asbestos | Estimating & Job Setup | Working on Nonroutine Jobs | Other | Total |
|------------------------------|-------------------|-------------------------|---------------------------|---------|------------|
| Wages and Salaries | 150,000 | 30,000 | 90,000 | 30,000 | 300,000 |
| Disposal Fees | 420,000 | 0 | 280,000 | 0 | 700,000 |
| Equipment Depreciation | 36,000 | 4,500 | 18,000 | 31,500 | 90,000 |
| On-site Supplies | 30,000 | 15,000 | 5,000 | 0 | 50,000 |
| Office Expenses | 20,000 | 70,000 | 50,000 | 60,000 | 200,000 |
| Licensing and Insurance | 120,000 | 0 | 200,000 | 80,000 | 400,000 |
| **Total Costs** | **776,000** | **119,500** | **643,000** | **201,500** | **1,740,000**|
### **Step 2: Compute the Activity Rates for the Activity Cost Pools**
The activity rates are calculated by dividing the total cost for each activity by the appropriate activity measure.
1. **Removing Asbestos Cost Rate:**
\[
\text{Rate} = \frac{776,000}{800 \text{ thousand square feet}} = 970 \text{ per thousand square feet}
\]
2. **Estimating and Job Setup Cost Rate:**
\[
\text{Rate} = \frac{119,500}{500 \text{ jobs}} = 239 \text{ per job}
\]
3. **Working on Nonroutine Jobs Cost Rate:**
\[
\text{Rate} = \frac{643,000}{100 \text{ nonroutine jobs}} = 6,430 \text{ per nonroutine job}
\]
### **Step 3: Calculate the Total Cost and Average Cost Per Thousand Square Feet**
1. **Routine 1,000-Square-Foot Asbestos Removal Job:**
- Removing Asbestos: \(970 \times 1 = 970\)
- Estimating and Job Setup: \(239 \times 1 = 239\)
- Total Cost: \(970 + 239 = 1,209\)
- Average Cost Per Thousand Square Feet: \(1,209\)
2. **Routine 2,000-Square-Foot Asbestos Removal Job:**
- Removing Asbestos: \(970 \times 2 = 1,940\)
- Estimating and Job Setup: \(239 \times 1 = 239\)
- Total Cost: \(1,940 + 239 = 2,179\)
- Average Cost Per Thousand Square Feet: \(\frac{2,179}{2} = 1,089.50\)
3. **Nonroutine 2,000-Square-Foot Asbestos Removal Job:**
- Removing Asbestos: \(970 \times 2 = 1,940\)
- Estimating and Job Setup: \(239 \times 1 = 239\)
- Working on Nonroutine Jobs: \(6,430 \times 1 = 6,430\)
- Total Cost: \(1,940 + 239 + 6,430 = 8,609\)
- Average Cost Per Thousand Square Feet: \(\frac{8,609}{2} = 4,304.50\)
### **Summary of Results**
- **Routine 1,000-SF Cost:** $1,209 (or $1,209 per thousand square feet)
- **Routine 2,000-SF Cost:** $2,179 (or $1,089.50 per thousand square feet)
- **Nonroutine 2,000-SF Cost:** $8,609 (or $4,304.50 per thousand square feet)
### **Step 1: First-stage Allocation of Costs to Activity Cost Pools**
We will allocate the total costs based on the distribution of resource consumption across activities.
1. **Wages and Salaries**
- Removing Asbestos: \(300,000 \times 50\% = 150,000\)
- Estimating and Job Setup: \(300,000 \times 10\% = 30,000\)
- Working on Nonroutine Jobs: \(300,000 \times 30\% = 90,000\)
- Other: \(300,000 \times 10\% = 30,000\)
2. **Disposal Fees**
- Removing Asbestos: \(700,000 \times 60\% = 420,000\)
- Estimating and Job Setup: \(700,000 \times 0\% = 0\)
- Working on Nonroutine Jobs: \(700,000 \times 40\% = 280,000\)
- Other: \(700,000 \times 0\% = 0\)
3. **Equipment Depreciation**
- Removing Asbestos: \(90,000 \times 40\% = 36,000\)
- Estimating and Job Setup: \(90,000 \times 5\% = 4,500\)
- Working on Nonroutine Jobs: \(90,000 \times 20\% = 18,000\)
- Other: \(90,000 \times 35\% = 31,500\)
4. **On-site Supplies**
- Removing Asbestos: \(50,000 \times 60\% = 30,000\)
- Estimating and Job Setup: \(50,000 \times 30\% = 15,000\)
- Working on Nonroutine Jobs: \(50,000 \times 10\% = 5,000\)
- Other: \(50,000 \times 0\% = 0\)
5. **Office Expenses**
- Removing Asbestos: \(200,000 \times 10\% = 20,000\)
- Estimating and Job Setup: \(200,000 \times 35\% = 70,000\)
- Working on Nonroutine Jobs: \(200,000 \times 25\% = 50,000\)
- Other: \(200,000 \times 30\% = 60,000\)
6. **Licensing and Insurance**
- Removing Asbestos: \(400,000 \times 30\% = 120,000\)
- Estimating and Job Setup: \(400,000 \times 0\% = 0\)
- Working on Nonroutine Jobs: \(400,000 \times 50\% = 200,000\)
- Other: \(400,000 \times 20\% = 80,000\)
Now, we sum the allocated costs for each activity cost pool:
| Cost Pool | Removing Asbestos | Estimating & Job Setup | Working on Nonroutine Jobs | Other | Total |
|------------------------------|-------------------|-------------------------|---------------------------|---------|------------|
| Wages and Salaries | 150,000 | 30,000 | 90,000 | 30,000 | 300,000 |
| Disposal Fees | 420,000 | 0 | 280,000 | 0 | 700,000 |
| Equipment Depreciation | 36,000 | 4,500 | 18,000 | 31,500 | 90,000 |
| On-site Supplies | 30,000 | 15,000 | 5,000 | 0 | 50,000 |
| Office Expenses | 20,000 | 70,000 | 50,000 | 60,000 | 200,000 |
| Licensing and Insurance | 120,000 | 0 | 200,000 | 80,000 | 400,000 |
| **Total Costs** | **776,000** | **119,500** | **643,000** | **201,500** | **1,740,000**|
### **Step 2: Compute the Activity Rates for the Activity Cost Pools**
The activity rates are calculated by dividing the total cost for each activity by the appropriate activity measure.
1. **Removing Asbestos Cost Rate:**
\[
\text{Rate} = \frac{776,000}{800 \text{ thousand square feet}} = 970 \text{ per thousand square feet}
\]
2. **Estimating and Job Setup Cost Rate:**
\[
\text{Rate} = \frac{119,500}{500 \text{ jobs}} = 239 \text{ per job}
\]
3. **Working on Nonroutine Jobs Cost Rate:**
\[
\text{Rate} = \frac{643,000}{100 \text{ nonroutine jobs}} = 6,430 \text{ per nonroutine job}
\]
### **Step 3: Calculate the Total Cost and Average Cost Per Thousand Square Feet**
1. **Routine 1,000-Square-Foot Asbestos Removal Job:**
- Removing Asbestos: \(970 \times 1 = 970\)
- Estimating and Job Setup: \(239 \times 1 = 239\)
- Total Cost: \(970 + 239 = 1,209\)
- Average Cost Per Thousand Square Feet: \(1,209\)
2. **Routine 2,000-Square-Foot Asbestos Removal Job:**
- Removing Asbestos: \(970 \times 2 = 1,940\)
- Estimating and Job Setup: \(239 \times 1 = 239\)
- Total Cost: \(1,940 + 239 = 2,179\)
- Average Cost Per Thousand Square Feet: \(\frac{2,179}{2} = 1,089.50\)
3. **Nonroutine 2,000-Square-Foot Asbestos Removal Job:**
- Removing Asbestos: \(970 \times 2 = 1,940\)
- Estimating and Job Setup: \(239 \times 1 = 239\)
- Working on Nonroutine Jobs: \(6,430 \times 1 = 6,430\)
- Total Cost: \(1,940 + 239 + 6,430 = 8,609\)
- Average Cost Per Thousand Square Feet: \(\frac{8,609}{2} = 4,304.50\)
### **Summary of Results**
- **Routine 1,000-SF Cost:** $1,209 (or $1,209 per thousand square feet)
- **Routine 2,000-SF Cost:** $2,179 (or $1,089.50 per thousand square feet)
- **Nonroutine 2,000-SF Cost:** $8,609 (or $4,304.50 per thousand square feet)