Problem 7-18 Activity-Based Costing and Bidding on Jobs [LO7-2, 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 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 $3.20 to determine the bid price. Since our average cost is only $2.75 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 Removing asbestos Estimating and job setup Working on nonroutine jobs Other (costs of idle capacity and organization-sustaining costs) Activity Measure Thousands of square feet Number of jobs Number of nonroutine jobs Total Activity 800 thousand square feet 500 jobs 100 nonroutine jobs None Note: 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 Year Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance $ 470,000 801,000 110,000 68,000 370,000 570,000 Total cost $ 2,389,000 Distribution of Resource Consumption Across Activities Estimating Working on Removing and Job Nonroutine Asbestos Setup Jobs Wages and salaries 60% 10% 20% Disposal fees 60% 0% 40% Equipment depreciation 50% 10% 15% On-site supplies 60% 25% 15% Office expenses 10% 40% 15% Licensing and insurance 30% 0% 50% Other 10% 0% 25% 0% 35% 20% Total 100% 100% 100% 100% 100% 100% Required: 1. Perform the first-stage allocation of costs to the activity cost pools. Removing Estimating and Working on Asbestos Job Setup Nonroutine Jobs Other Total Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost 2. Compute the activity rates for the activity cost pools. Activity Rate Activity Cost Pool Removing asbestos Estimating and job setup Working on nonroutine jobs per thousand square feet per job per nonroutine job 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. (Round the "Average cost" to 2 decimal places.) a. A routine 1,000-square-foot asbestos removal job. Total cost of the job Average cost per thousand square feet b. A routine 2,000-square-foot asbestos removal job. Total cost of the job Average cost per thousand square feet c. A nonroutine 2,000-square-foot asbestos removal job. Total cost of the job Average cost per thousand square feet
