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 $2.80 to determine the bid price. Since our average cost is only $2.315 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 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 $ 360,000
Disposal fees 765,000
Equipment depreciation 98,000
On-site supplies 57,000
Office expenses 270,000
Licensing and insurance 470,000
Total cost $ 2,020,000
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 70 % 0 % 30 % 0 % 100 %
Equipment depreciation 40 % 5 % 20 % 35 % 100 %
On-site supplies 60 % 30 % 10 % 0 % 100 %
Office expenses 15 % 35 % 20 % 30 % 100 %
Licensing and insurance 30 % 0 % 50 % 20 % 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.