Problem 7-18 (Algo) Activity-Based Costing and Bidding on Jobs [LO7-2, LO7-3, LO7-4] Mercer Asbestos Removal Company removes potentially toxic asbestos insulation from buildings. There has been a long-simmering dispute between the company's estimator and the work supervisors. The on-site 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 asbestos-contaminated ceiling plaster in industrial buildings. The on-site 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 $2.50 to determine the bid price. Because our average cost is only $2.155 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 activity-based costing data: Activity Measure Thousands of square feet Number of jobs Activity Cost Pool Removing asbestos Estimating and job setup Working on nonroutine jobs Other (organization-sustaining costs and idle capacity costs) None Number of nonroutine jobs Total Activity 1,000 thousand square feet 400 jobs 100 nonroutine jobs Note: The 100 nonroutine jobs are included in the total of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Costs for the Year Disposal fees Wages and salaries Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost $ 328,000 706,000 90,000 53,000 230,000 430,000 $ 1,837,000 Distribution of Resource Consumption Across Activities Estimating Working on Removing and Job Nonroutine Asbestos Setup Jobs Other Total Wages and salaries 60 % 10% 20% 10% 100% Disposal fees 60% 0% 40% 0% 100% Equipment depreciation 40% 5% 20% 35% 100% On-site supplies 70% 20% 10% 0% 100% Office expenses 10% 35% 25% 30% 100% Licensing and insurance 35% 0% 50% 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. Calculate 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3A to 3C Perform the first-stage allocation of costs to the activity cost pools. Removing asbestos Estimating and Job Setup Working on Nonroutine Jobs Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost < Required 1 Required 2 Other Total Required 3A to Required 1 Required 2 3C Compute the activity rates for the activity cost pools. Activity Cost Pool Removing asbestos Estimating and job setup Activity Rate per thousand square feet per job per nonroutine job Working on nonroutine jobs < Required 1 Required 3A to 3C > Required 1 Required 2 Required 3A to 3C Calculate the total cost and the average cost per thousand square feet of each of the following jobs according to the activity- based costing system. Note: Round the "Average Cost per thousand square feet" to 2 decimal places. 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. Routine 1,000 square feet job Routine 2,000 square feet job Nonroutine 2,000 square feet job Total cost of the job Average Cost per thousand square feet < Required 2 Required 3A to 3C > Show less