Reference no: EM132515163
Point 1: 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 $3.20 to determine the bid price. Since our average cost is only $2.745 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."
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 of Resource Consumption Across Activities Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs OtherTotal
Wages and salaries60% 10% 20% 10%100%
Disposal fees60% 0% 40% 0%100%
Equipment depreciation50% 10% 15% 25%100%
On-site supplies60% 25% 15% 0%100%
Office expenses10% 40% 15% 35%100%
Licensing and insurance30% 0% 50% 20%100%
Required:
Question 1. Perform the first-stage allocation of costs to the activity cost pools.
Question 2. Compute the activity rates for the activity cost pools.
Question 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.