Assignment Tasks:

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

Compute the activity rates for the activity cost pools.

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

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

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A non$-$routine $2,000-$square$-$metre 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?

$5.$ A contribution format income statement for each year, using variable costing. Be sure to reconcile the variable costing and absorption costing operation income figures for each year.

$6.$ A brief discussion of the advantages and disadvantages of variable over absorption costing for internal reporting purposes.

$7.$ A discussion of the ramifications of returning to the "normal" level of production in the coming year.

$8.$ A recommendation: Should the company continue to "overproduce" in coming years to boost operating income?

Question $1$

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 $"$Mly iob is to measure the

Question $1$

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

Removing asbestos Estimating and job setup Working on non$-$routine jobs

Activity Measure

Thousands of square metres

Number of jobs

Number of non$-$routine jobs

Total Activity

$500,000m2$

$200$ 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.

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.

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