Activity-Based Costing and Bidding on Jobs Mercer Asbestos Removal Company removes 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 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 $2.175 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 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 non routine 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... Disposal fees... Equipment depreciation.. On-site supplies. Office expenses. Licensing and Insurance Total cost. $ 300,000 700.000 90,000 50.000 200.000 400,000 $1,740,000 Total Wages and salaries. Disposal fees. Equipment depreciation... On-site supplies.. Office expenses.. Lloensing and Insurance Distribution of Resource Consumption across Activities Estimating Working on Removing and Nonroutine Asbestos Job Setup Jobs Other 50% 10% 30% 10% 60% 0% 40% 0% 40% 59 20% 35% 60% 30% 10% 0% 1096 35% 25% 30% 30% 0% 50% 20% 100% 100% 100% 100% 100% 100% Required: 1. Using Exhibit 66 as a guide, perform the first-stage allocation of costs to the activity cost pools. 2. Using Exhibit 67 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 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. 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? (Reference Exhibit 66,7) Totals EXHIBIT 6-6 First-Stage Allocations to Activity Cost Pools A B D E F 1 Activity Cost Pools Customer Product Customer 2 Orders Design Order Size Relations Other 4 Production Department 5 Indirect factory wages $ 125 000 $ 200,000 $100,000 $50,000 $ 25,000 $ 6 Factory equipment depreciation 60.000 0 180.000 0 50,000 7 Factory utilities 0 12,000 60,000 0 48,000 8 Factory building lease 0 0 0 0 80,000 10 General Administrative Department: 11 Administrative wages and salaries 60.000 20.000 40,000 120,000 150 000 12 Office equipment depreciation 15.000 0 0 12,500 .22.500 13 Administrative building lease 0 0 0 60,000 15 Marketing Department 16 Marketing wages and salaries 55.000 20.000 0 150.000 25,000 17 Selling expenses 5.000 35.000 10.000 19 Total S 320.000 5 252.000 380.00 5.267.500 490.500 HEH Fxhibit 6-5. Fxhibit 6-fi. Fatih 6-7 Fuhhit 64 Fahibition 500,000 /300,000 120,000 80,000 400,000 50,000 60,000 0 250,000 50.000 11.810.000 Exhibit 6-5 shows that Customer Orders consume 25% of the resources represented by the $500,000 of indirected factory wages. 25% x $500,000 = $125,000 Other entries in the table are computed in a similar fashion. EXHIBIT 6-7 Computation of Activity Rates A B (a) 1 Activity Cost Pools Total Cost* 2 Customer orders $320,000 3 Product design $252,000 4 Order size $380,000 5 Customer relations $367,500 6 Other $490,500 8 From Exhibit 6-6. Exhibit 6-5 Exhibit 6-6 Exhibit 6-7 D (6) Total Activity 1,000 orders 400 designs 20,000 MHs 250 customers Not applicable E F (a) = (b) Activity Rate $320 per order $630 per design $19 per MH $1,470 per customer Not applicable Exhibit 6-9