problem 1

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 $3.00 to determine the bid price. Since our average cost is only $2.675 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 PoolActivity MeasureTotal ActivityRemoving asbestosThousands of square feet800thousand square feetEstimating and job setupNumber of jobs500jobsWorking on nonroutine jobsNumber of nonroutine jobs100nonroutine jobsOther (organization-sustaining costs and idle capacity costs)NoneNote: The 100 nonroutine jobs are included in the total of 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup.

Costs for the YearWages and salaries$423,000Disposal fees802,000Equipment depreciation96,000On-site supplies62,000Office expenses320,000Licensing and insurance510,000Total cost$2,213,000

Distribution of Resource Consumption Across ActivitiesRemoving AsbestosEstimating and Job SetupWorking on Nonroutine JobsOtherTotalWages and salaries50%10%30%10%100%Disposal fees70%0%30%0%100%Equipment depreciation50%10%15%25%100%On-site supplies60%30%10%0%100%Office expenses10%35%25%30%100%Licensing and insurance25%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.

problem 2

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 $23.10 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 PoolActivity MeasureActivity for the YearCleaning carpetsSquare feet cleaned (00s)10,000hundred square feetTravel to jobsMiles driven377,500milesJob supportNumber of jobs2,000jobsOther (organization-sustaining costs and idle capacity costs)NoneNot applicable

The total cost of operating the company for the year is $339,000 which includes the following costs:

Wages$137,000Cleaning supplies21,000Cleaning equipment depreciation12,000Vehicle expenses27,000Office expenses66,000President's compensation76,000Total cost$339,000

Resource consumption is distributed across the activities as follows:

Distribution of Resource Consumption Across ActivitiesCleaning CarpetsTravel to JobsJob SupportOtherTotalWages 72% 10% 0% 18%

100% Cleaning supplies 100% 0% 0% 0% 100% Cleaning equipment depreciation72% 0% 0% 28% 100% Vehicle expenses0%83%0%17%100%Office expenses0%0%57%43%100%President's compensation0%0%29%71%100%

Job 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 51-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 $138.60 (600 square feet @ $23.10 per hundred square feet). Calculate the customer margin earned on this job.