P6–6 Activity rates and pricing jobs Time allowed: 45 minutes Mercer Asbestos Removal Company is in the business of removing 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 onsite supervisors claim that the estimators do not take enough care in distinguishing 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 non-routine 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 meterage by £2.50 to determine the bid price.
Since our average cost is only £2.175 per square metre, that leaves enough cushion to take care of the additional costs of non-routine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tearing things apart.’
Partly to shed light on this controversy, the company initiated an activitybased costing study of all of its costs. Data from the activity-based costing system follow:

Required 1 Perform the first-stage allocation of costs to the activity cost pools. (Use Exhibit 6.4 as a guide.)
2 Compute the activity rates for the activity cost pools. (Use Exhibit 6.5 as a guide.)
3 Using the activity rates you have computed, determine the total cost and the average cost per thousand square metres of each of the following jobs according to the activity-based costing system.

(a) A routine 1,000 square metre asbestos removal job.

(b) A routine 2,000 square metre asbestos removal job.

(c) A non-routine 2,000 square metre asbestos removal job.
4 Given the results you obtained in Question 3 above, do you agree with the estimator that the company’s present policy for bidding on jobs is adequate?

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Activity cost pool Job size Estimating and job set-up Dealing with non-routine jobs Other (costs of idle capacity and organization- sustaining costs) Wages and salaries Disposal fees Equipment depreciation On-site supplies Activity measure Thousands of square metres Number of jobs Number of non-routine jobs Not applicable; these costs are not allocated to jobs Costs for the year 300,000 700,000 90,000 Office expenses Licensing and insurance Total cost 50,000 200,000 400,000 1,740,000 Distribution of resource consumption across activities (percentages) Job size Estimating and Dealing with Other Total job set-up non-routine jobs Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance 30 88488 50 60 40 60 10 205830 10 842228 30 10 100 40 0 100 20 35 100 10 0 100 25 30 100 50 20 100