Problem Algo ActivityBased Costing and Bidding on Jobs LO LO LO

Mercer Asbestos Removal Company removes potentially toxic asbestos insulation from buildings. There has been a longsimmering dispute between the companys estimator and the work supervisors. The onsite supervisors claim the estimators do not adequately distinguish between routine work, such as removing asbestos insulation around heating pipes in older homes, and nonroutine work, such as removing asbestoscontaminated ceiling plaster in industrial buildings. The onsite supervisors believe 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 $ to determine the bid price. Because our average cost is only $ per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work. 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 gathered the following activitybased costing data:

Activity Cost Pool Activity Measure Total Activity

Removing asbestos Thousands of square feet thousand square feet

Estimating and job setup Number of jobs jobs

Working on nonroutine jobs Number of nonroutine jobs nonroutine jobs

Other organizationsustaining costs and idle capacity costs None

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

Costs for the Year

Wages and salaries $

Disposal fees

Equipment depreciation

Onsite supplies

Office expenses

Licensing and insurance

Total cost $

Distribution of Resource Consumption Across Activities

Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total

Wages and salaries

Disposal fees

Equipment depreciation

Onsite supplies

Office expenses

Licensing and insurance

Required:

Perform the firststage allocation of costs to the activity cost pools.

Compute the activity rates for the activity cost pools.

Calculate the total cost and the average cost per thousand square feet of each of the following jobs according to the activitybased costing system.

A routine squarefoot asbestos removal job.

A routine squarefoot asbestos removal job.

A nonroutine squarefoot asbestos removal job.