Activity-Based Costing and Bidding on Jobs [LO2, LO3, LO4]

Denny Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company’s estimator has been involved in a long-simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does 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 $4,000 per thousand square feet to determine the bid price.

Since our average cost is only $3,000 per thousand square feet, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up. Besides, it is diffi cult to know what is routine or nonroutine 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:

Required:
1. Using Exhibit 7–5 as a guide, perform the first-stage allocation of costs to the activity cost pools.
2. Using Exhibit 7–6 as a guide, 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 2,000-square-foot asbestos removal job.

b. A routine 4,000-square-foot asbestos removal job.

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

Transcribed Image Text:

Activity Cost Pool Removing asbestos..... Estimating and job setup Working on nonroutine jobs... Other (organization-sustaining and idle capacity costs) .... Activity Measure Thousands of square feet Number of jobs Number of nonroutine jobs None Total Activity 500 thousand square feet 200 jobs* 25 nonroutine jobs Not applicable *The total number of jobs includes nonroutine jobs as well as routine jobs. Nonroutine jobs as well as routine jobs require estimating and setup work. Costs for the Year Wages and salaries Disposal fees Equipment depreciation On-site supplies.. Office expenses Licensing and insurance Total cost... $ 200,000 600,000 80,000 60,000 190,000 370,000 $1,500,000 Distribution of Resource Consumption Across Activities Estimating Working on Removing and Nonroutine Asbestos Job Setup Jobs Other Total Wages and salaries.... 40% 10% 35% 15% 100% Disposal fees.... 70% 0% 30% 0% 100% Equipment depreciation 50% 0% 40% 10% 100% On-site supplies 55% 15% 20% 10% 100% Office expenses 10% 40% 30% 20% 100% Licensing and insurance 50% 0% 40% 10% 100%