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 $3.60 to determine the bid price. Since our average cost is only $2.845 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 750 thousand square feet

Estimating and job setup Number of jobs 400 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 of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.

Costs for the Year

Wages and salaries $ 460,000

Disposal fees 862,000

Equipment depreciation 104,000

On-site supplies 66,000

Office expenses 360,000

Licensing and insurance 560,000

Total cost $ 2,412,000

Distribution of Resource Consumption Across Activities

Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total

Wages and salaries 50 % 15 % 20 % 15 % 100 %

Disposal fees 70 % 0 % 30 % 0 % 100 %

Equipment depreciation 50 % 10 % 15 % 25 % 100 %

On-site supplies 60 % 30 % 10 % 0 % 100 %

Office expenses 15 % 35 % 20 % 30 % 100 %

Licensing and insurance 25 % 0 % 60 % 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. 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.

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Expert Answer

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Step 1

Given :

Costs for the Year

Wages and salaries $ 460,000

Disposal fees 862,000

Equipment depreciation 104,000

On-site supplies 66,000

Office expenses 360,000

Licensing and insurance 560,000

Total cost $ 2,412,000

Activity Cost Pool Activity Measure Total Activity

Removing asbestos Thousands of square feet 750 thousand square feet

Estimating and job setup Number of jobs 400 jobs

Working on nonroutine jobs Number of nonroutine jobs 100 nonroutine jobs

Other (organization-sustaining costs and idle capacity costs) None

Distribution of Resource Consumption Across Activities

Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total

Wages and salaries 50 % 15 % 20 % 15 % 100 %

Disposal fees 70 % 0 % 30 % 0 % 100 %

Equipment depreciation 50 % 10 % 15 % 25 % 100 %

On-site supplies 60 % 30 % 10 % 0 % 100 %

Office expenses 15 % 35 % 20 % 30 % 100 %

Licensing and insurance 25 % 0 % 60 % 15 % 100

Step 2

(1).

The first stage allocation of costs to the activity cost pools is shown below :

Description Removing asbestos Estimating & job setup Working on nonroutine jobs Other Total

Wages and salaries

(230,000)

460,000 * 50%
69,000 92,000 69,000 460,000

Disposal fees
(603,400)

862,000 * 70%
- 258,600 - 862,000

Equipment depreciation
(52,000)

104,000 * 50%
10,400 15,600 26,000 104,000

On-site suppliers
(39,600)

66,000 * 60%
19,800 6,600 - 66,000

Office expenses
(54,000)

360,000 * 15%
126,000 72,000 108,000 360,000

Licensing and insurance
(140,000)

560,000 * 25%
- 336,000 84,000 560,000

Total cost 1,119,000 225,200 780,800 287,000 2,412,000

Step 3

(2).

The activity rates for the activity cost pools are calculated below :

Activity cost pool Total cost (1) Total activity (2) Activity rates (1/2)

Removing asbestos 1,119,000 750 thousand square feet 1,492

Estimating & job setup 225,200 400 jobs 563

Working on non-routine jobs 780,800 100 nonroutine jobs 7808

Step 4

Since you have posted a question with multiple sub-parts, we will solve the first two subparts for you due to lack of time. To get the remaining sub-part solved please repost the complete question and mention the sub-parts to be solved.

Question

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 $3.60 to determine the bid price. Since our average cost is only $2.845 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	750	thousand square feet
Estimating and job setup	Number of jobs	400	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 of 400 jobs. Both nonroutine jobs and routine jobs require estimating and setup.

Costs for the Year
Wages and salaries	$	460,000
Disposal fees		862,000
Equipment depreciation		104,000
On-site supplies		66,000
Office expenses		360,000
Licensing and insurance		560,000
Total cost	$	2,412,000

Distribution of Resource Consumption Across Activities
	Removing Asbestos		Estimating and Job Setup		Working on Nonroutine Jobs	Other	Total
Wages and salaries	50	%		15	%	20	%	15	%	100	%
Disposal fees	70	%		0	%	30	%	0	%	100	%
Equipment depreciation	50	%		10	%	15	%	25	%	100	%
On-site supplies	60	%		30	%	10	%	0	%	100	%
Office expenses	15	%		35	%	20	%	30	%	100	%
Licensing and insurance	25	%		0	%	60	%	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. 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.

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Expert Answer

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Step 1

Given :

Costs for the Year
Wages and salaries	$	460,000
Disposal fees		862,000
Equipment depreciation		104,000
On-site supplies		66,000
Office expenses		360,000
Licensing and insurance		560,000
Total cost	$	2,412,000

Activity Cost Pool	Activity Measure	Total Activity
Removing asbestos	Thousands of square feet	750	thousand square feet
Estimating and job setup	Number of jobs	400	jobs
Working on nonroutine jobs	Number of nonroutine jobs	100	nonroutine jobs
Other (organization-sustaining costs and idle capacity costs)	None

Distribution of Resource Consumption Across Activities
	Removing Asbestos		Estimating and Job Setup		Working on Nonroutine Jobs	Other	Total
Wages and salaries	50	%		15	%	20	%	15	%	100	%
Disposal fees	70	%		0	%	30	%	0	%	100	%
Equipment depreciation	50	%		10	%	15	%	25	%	100	%
On-site supplies	60	%		30	%	10	%	0	%	100	%
Office expenses	15	%		35	%	20	%	30	%	100	%
Licensing and insurance	25	%		0	%	60	%	15	%	100

Step 2

(1).

The first stage allocation of costs to the activity cost pools is shown below :

Description	Removing asbestos	Estimating & job setup	Working on nonroutine jobs	Other	Total
Wages and salaries	(230,000) 460,000 * 50%	69,000	92,000	69,000	460,000
Disposal fees	(603,400) 862,000 * 70%	-	258,600	-	862,000
Equipment depreciation	(52,000) 104,000 * 50%	10,400	15,600	26,000	104,000
On-site suppliers	(39,600) 66,000 * 60%	19,800	6,600	-	66,000
Office expenses	(54,000) 360,000 * 15%	126,000	72,000	108,000	360,000
Licensing and insurance	(140,000) 560,000 * 25%	-	336,000	84,000	560,000
Total cost	1,119,000	225,200	780,800	287,000	2,412,000

Step 3

(2).

The activity rates for the activity cost pools are calculated below :

Activity cost pool	Total cost (1)	Total activity (2)	Activity rates (1/2)
Removing asbestos	1,119,000	750 thousand square feet	1,492
Estimating & job setup	225,200	400 jobs	563
Working on non-routine jobs	780,800	100 nonroutine jobs	7808

Step 4

Since you have posted a question with multiple sub-parts, we will solve the first two subparts for you due to lack of time. To get the remaining sub-part solved please repost the complete question and mention the sub-parts to be solved.

Accepted Answer

Solution 1:

First stage allocation of cost to activity cost pools

Particulars…