DENNY ASBESTOS REMOVAL COMPANY Activity Cost Pool: Activity Measure Total Activity Removing asbestos Thousands of square feet 500 Estimating and job setup (per job) Number of jobs 200 Working on nonroutine jobs (per job) Number of nonroutine jobs 25 Other N/A Costs for the year: 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 Nonroutine Asbestos Setup Jobs Other Totals 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%DENNY ASBESTOS REMOVAL COMPANY First Stage Allocation Estimating Working on Removing and Job Nonroutine Asbestos Setup Jobs Other Totals Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost 2. DENNY ASBESTOS REMOVAL COMPANY Activity Rates for Activity Cost Pools Total Activity Activity Cost Pool Total Cost Activity Rate Removing Asbestos per thousand square feet Estimating and job setup per job Working on nonroutine jobs per nonroutine job 3. DENNY ASBESTOS REMOVAL COMPANY Total and Average Cost per Thousand Square Feet a. Routine job - square feet 2,000 Removing asbestos Estimating and job set-up Nonroutine job Total cost of the job Cost per thousand square feet b. Routine job - square feet 4,000 Removing asbestos Estimating and job set-up Nonroutine job Total cost of the job Average cost per thousand square feet c. Nonroutine job - square feet 2,000 Removing asbestos Estimating and job set-up Nonroutine job Total cost of the job Average cost per thousand square feetPROBLEM 7-19 Activity-Based Costing and Bidding on Jobs [L02, L03, L04] Denny Asbestos Removal Company removes potentially toxic asbestos insulation and related prod- ucts 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 nonroutine work such as removing asbestos-contaminated ceiling plaster in in- dustrial 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 $4,000 per thousand square feet to determine the bid price. Since our average cost is only $3,000 per thousand square feet, that leaves enough cushion to takecare of the additional costs of nonroutine work that shows up. Besides, it is difficult to know what is routine or nonroutine 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 500 thousand square feet Estimating and job setup . .. .. Number of jobs 200 jobs* Working on nonroutine jobs . . . Number of nonroutine jobs 25 nonroutine jobs Other (organization-sustaining and idle capacity costs) . . .. None Not applicable "The total number of jobs includes nonroutine jobs as well as routine jobs. Nonroutine jobs as well as routine jobs require estimating and setup work. Costs for the Year 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 Activities Estimating Working on Removing and Nonroutine Asbestos Job 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. Using Exhibit 7-5 as a guide, perform the first-stage allocation of costs to the activity cost pools. 2. Using Exhibit 7-6 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 2,000-square-foot asbestos removal job. b. A routine 4,000-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 com- pany's present policy for bidding on jobs is adequate