COST ACCOUNTING.

QUESTION 3

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 $2.80 to determine the bid price. Since our average cost is only $2.305 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 800thousand square feet

Estimating and job setup Number of jobs 400 jobs

Working on non routine jobs Number of non routine jobs 100nonroutine jobs

Other (organization-sustaining costs

and idle capacity costs) None

Note: The 100 non routine jobs are included in the total of 400 jobs. Both non routine jobs and routine jobs require estimating and setup.

Costs for the YearWages and salaries $332,000

Disposal fees 740,000

Equipment depreciation 90,000

On-site supplies 54,000

Office expenses 240,000

Licensing and insurance 440,000

Total cost $1,896,000

Distribution of Resource Consumption Across Activities

Estimating Working on

Removing and Job Nonroutine

Asbestos Setup Jobs Other Total

Wages and salaries 50% 10% 30% 10% 100%

Disposal fees 70% 0% 30% 0% 100%

Equipment depreciation 40% 5% 20% 35% 100%

On-site supplies 60% 25% 15% 0% 100%

Office expenses 10% 40% 15% 35% 100%

Licensing and insurance 25% 0% 60% 5% 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 non routine 2,000-square-foot asbestos removal job.

Question 4

Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the company's work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies.

The young founders of the company have become increasingly concerned with the economics of the businessparticularly since many competitors have sprung up recently in the local area. To help understand the company's cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the animation goes into production and contract administration begins. Almost all of the work involved in animation production is done by the technical staff, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures are listed below:

Activity Cost Pool Activity Measure Activity Rate

Animation concept Number of proposals $6,200per proposal

Animation production Minutes of completed animation $7,500per minute

Contract administration Number of contracts $6,400per contract

These activity rates include all of the company's costs, except for its organization-sustaining costs and idle capacity costs. There are no direct labor or direct materials costs.

Preliminary analysis using these activity rates has indicated that the local commercial segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the local commercial market appear below

Activity Measure Local

Commercials

Number of proposals 16

Minutes of completed animation 11

Number of contracts 11

The total sales from the 11 contracts for local commercials was $310,000.

Required:

1. Calculate the cost of serving the local commercial market.

2. Calculate the margin earned serving the local commercial market. (Remember, this company has no direct materials or direct labor costs.)

QUESTION 5

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $22.90 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customersparticularly those located on remote ranches that require considerable travel time. The owner's daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below:

Activity Cost Pool Activity Measure Activity for the Year

Cleaning carpets Square feet cleaned (00s) 7,500hundred square feet

Travel to jobs Miles driven 285,500miles

Job support Number of jobs 2,000jobs

Other (organization-sustaining costs and

idle capacity costs) None Not applicable

The total cost of operating the company for the year is $360,000 which includes the following costs:

Wages $144,000

Cleaning supplies 31,000

Cleaning equipment depreciation 6,000

Vehicle expenses 36,000

Office expenses 66,000

President's compensation 77,000

Total cost $360,000

Resource consumption is distributed across the activities as follows:

Cleaning Travel to Job

Carpets Jobs Support Other Total

Wages 77% 14% 0% 9% 100%

Cleaning supplies 100% 0% 0% 0% 100%

Cleaning equipment depreciation 73% 0% 0% 27% 100%

Vehicle expenses 0% 83% 0% 17% 100%

Office expenses 0% 0% 57% 43% 100%

President's compensation 0% 0% 27% 73% 100%

ob support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Required:

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

2. Compute the activity rates for the activity cost pools.

3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Rancha 55-mile round-trip journey from the company's offices in Bozeman. Compute the cost of this job using the activity-based costing system.

4. The revenue from the Flying N Ranch was $137.40 (600 square feet @ $22.90 per hundred square feet). Calculate the customer margin earned on this job.