Activity$-$Based Costing and Bidding on Jobs

Vance 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 non$-$routine 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 metres by $$4,000$ per thousand square metres to determine the bid price. Since our average cost is only $$3,000$ per thousand square metres, 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."

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 metres $500,000$ m$2$

Estimating and job setup Number of jobs $200$ jobs$*$

Working on non$-$routine jobs Number of non$-$routine jobs $25$ non$-$routine jobs

Other $($costs of idle capacity and

organization$-$sustaining costs$)$ Not applicable; these costs are

not allocated to jobs

$*$The total number of jobs includes non$-$routine jobs as well as routine jobs. Non$-$routine jobs as well as routine jobs require estimating and setup work.

Wages and salaries $$200,000$

Disposal fees $600,000$

Equipment depreciation $80,000$

On$-$site supplies $60,000$

Office expenses $190,000$

Licensing and insurance $370,000$

Total cost $$1,500,000$

Distribution of Resource Consumption

across Activity Cost Pools

Estimating Working on

Removing and Job Non$-$routine

Asbestos 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 $50\%0\%40\%10\%100\%$

Required:

$1.$ Perform the first$-$stage allocation of costs to the activity cost pools. $10$ Marks

$2.$ Compute the activity rates for the activity cost pools. $10$ Marks

$3.$ 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 $2,000-$square$-$metre asbestos removal job.

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

c$.$ A non$-$routine $2,000-$square$-$metre asbestos removal job. $10$ Marks

$4.$ 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? $5$ Marks