Chapter 7 Canvas Homewerk - SHOW YOUR WORK FOR CREDIT M Www WON Activity Based Costing and Job Bidding el problem song down we wsing 0 NO 20 w V MOR REW im en Theme w they obcho whose Www WWW w Crew www. Www A SA AM 2001 www The 100 000 ODS 14.000 DOR DOO men Cheng 122.000 000 Pesurance in the Yanshow your Fire State Alcantecostat Activity Pood Estimating Worang Asbe Other Tott Hown facts 30 000 es BA Dora 38180 mont con S000 TO Tots 11 ting SH 2010 000 100 00 Avea 1 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-sustaihing 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 15% 0% Distribution of Resource Consumption Across Activities Removing AsbestosEstimating and Job Setup Working on Nonroutine Jobs Other Total Wages and salaries 50% 20% 15% 100% Disposal fees 60% 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. 1 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 Estimating job Working Other Asbestos setup nonroutine jobs Wages & salaries Total $420,000 Disposal fees $814,000 Equipment depreciation $96,000 On-site supplies $62,000 T: 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 Aspestes Estimating & job setup Working on nonroutine jobs I 3. Job a: Total Cost s Ave cost per $1,000 saft $ Jobb: Total Cost s Ave cost per $1,000 saft $ Job c: Total Cost $ Ave cost per $1,000 sqft $ Chapter 7 Canvas Homewerk - SHOW YOUR WORK FOR CREDIT M Www WON Activity Based Costing and Job Bidding el problem song down we wsing 0 NO 20 w V MOR REW im en Theme w they obcho whose Www WWW w Crew www. Www A SA AM 2001 www The 100 000 ODS 14.000 DOR DOO men Cheng 122.000 000 Pesurance in the Yanshow your Fire State Alcantecostat Activity Pood Estimating Worang Asbe Other Tott Hown facts 30 000 es BA Dora 38180 mont con S000 TO Tots 11 ting SH 2010 000 100 00 Avea 1 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-sustaihing 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 15% 0% Distribution of Resource Consumption Across Activities Removing AsbestosEstimating and Job Setup Working on Nonroutine Jobs Other Total Wages and salaries 50% 20% 15% 100% Disposal fees 60% 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. 1 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 Estimating job Working Other Asbestos setup nonroutine jobs Wages & salaries Total $420,000 Disposal fees $814,000 Equipment depreciation $96,000 On-site supplies $62,000 T: 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 Aspestes Estimating & job setup Working on nonroutine jobs I 3. Job a: Total Cost s Ave cost per $1,000 saft $ Jobb: Total Cost s Ave cost per $1,000 saft $ Job c: Total Cost $ Ave cost per $1,000 sqft $