PROBLEM 7-18 Activity-Based Costing and Bidding on Jobs L07-2, L07-3, LO7-4 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 estima- tor 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 Activity-Based Costing: A Tool to Aid Decision Making 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 $2.50 to determine the bid price. Since our average cost is only $2.175 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 800 thousand square feet Estimating and job setup Number of jobs 500 jobs Working on nonroutine jobs Number of nonroutine jobs 100 nonroutine jobs Other (organization-sustaining costs and idle capacity costs) .... None Note: The 100 nonroutine jobs are included in the total 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Costs for the Year Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost $ 300,000 700,000 90,000 50.000 200,000 400,000 $1,740,000 Distribution of Resource Consumption Across Activities Estimating Removing and Job Asbestos Setup Working on Nonroutine Jobs Other Total Wages and salaries Disposal fees.... Equipment depreciation On-site supplies Office expenses Licensing and insurance 50% 60% 40% 60% 10% 30% 10% 0% 5% 30% 35% 0% 30% 40% 20% 10% 25% 50% 10% 0% 35% 0% 30% 20% 100% 100% 100% 100% 100% 100% Required: 1. Using Exhibit 7-6 as a guide, perform the first-stage allocation of costs to the activity cost pools 2 Using Exhibit 7-7 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 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. 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? 4
