Denny Asbestos Removal Company removes potentially toxic asbestos insulation and

Question

Denny 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 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 $4,000 per thousand square feet to determine the bid price. Since our average cost is only $3,000 per thousand square feet, 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 nonroutine 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:

* The total number of jobs includes nonroutine jobs as well as routine jobs. Nonroutine jobs as well as routine jobs require estimating and setup work.

Distribution of Resource Consumption Across Activities

Perform the first-stage allocation of costs to the activity cost pools.

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" to 2 decimal places.)

Denny 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 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 $4,000 per thousand square feet to determine the bid price. Since our average cost is only $3,000 per thousand square feet, 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 nonroutine until you actually start tearing things apart.”

Explanation / Answer

Answer 1 First stage allocation of costs to the activity cost pools in $ Cost Removing Asbestos Estimatig & Job setup Working on nonroutine job Other Total Wages & Salaries                                 80,000                                     20,000                                                    70,000                               30,000                         2,00,000 Disposal Fees                             4,20,000                                              -                                                1,80,000                                        -                         6,00,000 Equipment Depreciation                                 40,000                                              -                                                    32,000                                 8,000                             80,000 On site supplies                                 33,000                                       9,000                                                    12,000                                 6,000                             60,000 Office expenses                                 19,000                                     76,000                                                    57,000                               38,000                         1,90,000 Licensing & Insurance                             1,85,000                                              -                                                1,48,000                               37,000                         3,70,000 Total                             7,77,000                                 1,05,000                                                4,99,000                           1,19,000                       15,00,000 Answer 2 Calculation of activity rate Removing asbestos = Total activity cost / Total activity = 777000 / 500 = $1554 per thousand square feet Estimating and Job setup = Total activity cost / Total activity = 105000 / 200 = $525 per job Working on nonroutine jobs = Total activity cost / Total activity = 499000 / 25 = $19960 per nonroutine job Other cost = Total activity cost / no.of jobs = 119000 / 200 = $595 per job Answer 3 Calculation of Total cost and average cost per thousand square feet (a) A routine 2,000-square-foot asbestos removal job Cost In $ Removing asbestos cost 3108 Estimating & Job setup 525 Other cost 595 Total Cost 4228 Average cost per Thousand sq.feet 2114 (b) A routine 4,000-square-foot asbestos removal job Cost In $ Removing asbestos cost 6216 Estimating & Job setup 525 Other cost 595 Total Cost 7336 Average cost per Thousand sq.feet 1834 (c) A nonroutine 2,000-square-foot asbestos removal job Cost In $ Removing asbestos cost 3108 Estimating & Job setup 525 Working on non routine jobs 19960 Other cost 595 Total Cost 24188 Average cost per Thousand sq.feet 12094

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