Question
Vance Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company's estimator has been involved in a long-simmering dispute with
Vance Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company's estimator has been involved in a long-simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between routine work such as removal of asbestos insulation around heating pipes in older homes and non-routine work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that non-routine 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 metres by $4,000 per thousand square metres to determine the bid price. Since our average cost is only $3,000 per thousand square metres, that leaves enough cushion to take care of the additional costs of non-routine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tearing things apart."
REQUIRED:
- Using the activity rates you have computed, determine the total cost and the average cost per thousand square metres of each of the following jobs according to the activity-based costing system.
- A routine 2,000-square-metre asbestos removal job.
- A routine 4,000-square-metre asbestos removal job.
- A non-routine 2,000-square-metre asbestos removal job.
- Given the results you obtained above, do you agree with the estimator that the company's present policy for bidding on jobs is adequate?
Data from the activity-based costing system follow:
Activity Cost Pool Activity Measure Total Activity
Removing asbestos Thousands of square metres 500,000 m2
Estimating and job setup Number of jobs 200 jobs*
Working on non-routine jobs Number of non-routine jobs 25 non-routine jobs
Other (costs of idle capacity and
organization-sustaining costs) Not applicable; these costs are
not allocated to jobs
*The total number of jobs includes non-routine jobs as well as routine jobs. Non-routine jobs as well as routine jobs require estimating and setup work.
Activity rates for the activity cost pools. | |||||
Activity Cost Pool | Total Activity | Total Cost | Activity Rate | ||
Removing asbestos | 500,000 | $ 777,000 | $ 1,554.00 | per thousand square metres | |
Estimating and job setup | 200 | 105,000 | 525 | per job | |
Working on non-routine jobs | 25 | 499,000 | 19,960 | per non-routine job | |
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