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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 $2.50 to determine the bid price. Since our average cost is only $2.175 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 800 thousand square  feet
  Estimating and job setup Number of jobs 500 jobs
  Working on nonroutine jobs Number of nonroutine jobs 100 nonroutine jobs
  Other (costs of idle capacity and
     organization-sustaining costs)
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 $ 300,000
  Disposal fees 700,000
  Equipment depreciation 90,000
  On-site supplies 50,000
  Office expenses 200,000
  Licensing and insurance 400,000
  Total cost $ 1,740,000
  Distribution of Resource Consumption Across Activities
Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total
  Wages and salaries 50 % 10 % 30 % 10 % 100 %
  Disposal fees 60 % 0 % 40 % 0 % 100 %
  Equipment depreciation 40 % 5 % 20 % 35 % 100 %
  On-site supplies 60 % 30 % 10 % 0 % 100 %
  Office expenses 10 % 35 % 25 % 30 % 100 %
  Licensing and insurance 30 % 0 % 50 % 20 % 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 Cost Pool Activity Rate
Removing asbestos per thousand square feet
Estimating and job setup per job
Working on nonroutine jobs 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 per thousand square feet" 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

          

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