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 nonrouting work, such as removing asbestos- contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that norrgutioe 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 norrgutioe 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 80 thousand square 0 feet Estimating and job setup Number of jobs 40 0 jobs Working on nonroutine jobs Number of nonroutine jobs 10 0 nonroutine jobs Other (organization-sustaining costs and idle capacity costs) None Note: The 100 norrgutioe jobs are included in the total of 400 jobs. Both nonroutioe jobs and routine jobs require estimating and setup. Costs for the Year $ 420,000 Wages and salaries Disposal fees 814,000 96,000 Equipment depreciation On-site supplies 62,000 Office expenses 320,000 520,000 Licensing and insurance Total cost $ 2,232,000 Distribution of Resource Consumption Across Activities Removing Estimating and Job Asbestos Setup Working on Nonroutine Jobs Other Total Wages and salaries 50% 15% 20% 15% 100% Disposal fees 60% 0% 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. 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 Asbestos setup nonroutine jobs Other Total $420,000 Wages & salaries Disposal fees $814,000 $96,000 Equipment depreciation On-site supplies $62,000 Office expenses $320,000 $520,000 Licensing & insurance 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 Aspestos Estimating & job setup Working on nonroutine jobs 3. Job a: Total Cost $ Ave cost per $1,000 sqft $ Job b: Total Cost $ Ave cost per $1,000 sqft $ Job c: Total Cost $ Ave cost per $1,000 sqft $
