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 $2.235 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 $ 317,000 Disposal fees 712,000 Equipment depreciation 97,000 On-site supplies 55,000 Office expenses 220,000 Licensing and insurance 420,000 Total cost $ 1,821,000 Distribution of Resource Consumption Across Activities Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total Wages and salaries 50% 15% 20% 15% 100% Disposal fees 60% 0% 40% 0% 100% Equipment depreciation 50% 10% 15% 25% 100% On-site supplies 60% 25% 15% 0% 100% Office expenses 10% 40% 15% 35% 100% Licensing and insurance 30% 0% 60% 10% 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.

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 $2.235 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 $ 317,000 Disposal fees 712,000 Equipment depreciation 97,000 On-site supplies 55,000 Office expenses 220,000 Licensing and insurance 420,000 Total cost $ 1,821,000 Distribution of Resource Consumption Across Activities Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total Wages and salaries 50% 15% 20% 15% 100% Disposal fees 60% 0% 40% 0% 100% Equipment depreciation 50% 10% 15% 25% 100% On-site supplies 60% 25% 15% 0% 100% Office expenses 10% 40% 15% 35% 100% Licensing and insurance 30% 0% 60% 10% 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.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter14: Quality And Environmental Cost Management

Section: Chapter Questions

Problem 28E: Environmental costs are those costs incurred because poor environmental quality exists or may exist....

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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

Costs for the Year
Wages and salaries	$ 317,000
Disposal fees	712,000
Equipment depreciation	97,000
On-site supplies	55,000
Office expenses	220,000
Licensing and insurance	420,000
Total cost	$ 1,821,000

Distribution of Resource Consumption Across Activities
	Removing Asbestos	Estimating and Job Setup	Working on Nonroutine Jobs	Other	Total
Wages and salaries	50%	15%	20%	15%	100%
Disposal fees	60%	0%	40%	0%	100%
Equipment depreciation	50%	10%	15%	25%	100%
On-site supplies	60%	25%	15%	0%	100%
Office expenses	10%	40%	15%	35%	100%
Licensing and insurance	30%	0%	60%	10%	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.
1. A routine 1,000-square-foot asbestos removal job.
2. A routine 2,000-square-foot asbestos removal job.
3. A nonroutine 2,000-square-foot asbestos removal job.

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