6.3

Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the companys 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 $2.50 to determine the bid price. Since our average cost is only $2.23 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 squarefeet
Estimating and job setup	Number of jobs		500		jobs
Working on nonroutine jobs	Number of nonroutine jobs		100		nonroutine jobs
Other (costs of idle capacity and organization-sustaining 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	%