ACCOUNT 249 Intro to Managerial Accounting

Chapter 7 Canvas Homework - SHOW YOUR WORK FOR CREDIT

Activity-Based Costing and Job Bidding

McDonald Asbestos Removal Company removes 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 $3.00 to determine the bid price. Since our average cost is only $2.755 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 square feet
Estimating and job setup	Number of jobs	400	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 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.

Costs for the Year
Wages and salaries	$ 420,000
Disposal fees	814,000
Equipment depreciation	96,000
On-site supplies	62,000
Office expenses	320,000
Licensing and insurance	520,000
Total cost	$ 2,232,000

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	40%	5%	20%	35%	100%
On-site supplies	60%	30%	10%	0%	100%
Office expenses	15%	35%	20%	30%	100%
Licensing and insurance	25%	0%	60%	15%	100%

Required:

1. Perform the first-stage allocation of costs to the activity cost pools.

2. 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 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.

Please write your answers in the boxes. You can show your work in the box or below.

1. First State Allocation - Allocate costs to Activity Pools
	Removing Asbestos	Estimating job setup	Working nonroutine jobs	Other	Total
Wages & salaries					$420,000
Disposal fees					$814,000
Equipment depreciation					$96,000
On-site supplies					$62,000
Office expenses					$320,000
Licensing & insurance					$520,000
Total	$952,000	$198,400	$811,000	$270,600	$2,232,000

2. Activity Rates (include units for full credit) e.g. $20,000 per machine hour:

Removing Aspestos ______________________

Estimating & job setup ______________________

Working on nonroutine jobs ______________________

3.

Job a: Total Cost $ _____________ Ave cost per $1,000 sqft $ _____________

Job b: Total Cost $ _____________ Ave cost per $1,000 sqft $ _____________

Job c: Total Cost $ _____________ Ave cost per $1,000 sqft $ _____________