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 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 $2.70 to determine the bid price. Since our average cost is only $2.405 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 (organization-sustaining costs and idle capacity costs) Activity Measuen Thousands of square feet Number of jobs Number of nonroutine jobs None Total Activity see thousand square feet 500 jobs 100 nonroutine jobs 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 $ 323,000 759,000 90,000 56,000 On-site supplies. office expenses Licensing and insurance, Total cost 250,000 450,000 $ 1,928,000 Distribution of Resource Consumption Across Activities Wages and salaries Removing Asbestos 60% Estimating and Job Setup Working on Nonroutine Jobs Other Total 10% 20% 10% 100% av < Prev 16 of 22 Next > costing system follow Activity Cost Pool Removing asbestos Oversy, the company maitu on acavity-based cusong suyuan Uvily used Estimating and job setup. Working on nonroutine jobs Other (organization-sustaining costs and idle capacity costs) Activity Measure Thousands of square feet Number of jobs Number of nonroutine jobs None Total Activity 200 thousand square feet 500 jobs 100 nonroutine jobs 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 $ 323,000 759,000 90,000 56,000 250,000 450,000 Total cost $ 1,928,000 Distribution of Resource Consumption Across Activities Estimating working on Removing and Job Asbestos Setup Jobs Other Total Mages and salaries Disposal fees Equipment depreciation On-site supplies office expenses Licensing and insurance Required: 60% 10% 20% 10% 100% 60% 0% 100% 40% 35% 100% 70% 20% 10% ex 100% 15% 35% 20% 30% 100% 25% ex 60% 15% 100% 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.