| Activity based costing and budgeting
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 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
500
thousand square feet
Estimating and job setup
Number of jobs
200
jobs*
Working on nonroutine jobs
Number of nonroutine jobs
25
nonroutine 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 nonroutine jobs as well as routine jobs. Nonroutine jobs as well as routine jobs require estimating and setup work.
Wages and salaries
$
200,000
Disposal fees
600,000
Equipment depreciation
80,000
On-site supplies
60,000
Office expenses
190,000
Licensing and insurance
370,000
Total cost
$
1,500,000
--------------------------------------------------------------------------------
Distribution of Resource Consumption
Across Activity Cost Pools
Removing Asbestos
Estimating and Job Setup
Working on Nonroutine Jobs
Other
Total
Wages and salaries
40
%
10
%
35
%
15
%
100
%
Disposal fees
70
%
0
%
30
%
0
%
100
%
Equipment depreciation
50
%
0
%
40
%
10
%
100
%
On-site supplies
55
%
15
%
20
%
10
%
100
%
Office expenses
10
%
40
%
30
%
20
%
100
%
Licensing and insurance
50
%
0
%
40
%
10
%
100
%
--------------------------------------------------------------------------------
Requirement 1:
Perform the first-stage allocation of costs to the activity cost pools. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
Removing Asbestos
Estimating
and Job
Setup
Working on Nonroutine
Jobs
Other
Total
Wages and salaries
$
____________
$
____________
$
____________
$
____________
$
____________
Disposal fees
____________
____________
____________
____________
____________
Equipment depreciation
____________
____________
____________
____________
____________
On-site supplies
____________
____________
____________
____________
____________
Office expenses
____________
____________
____________
____________
____________
Licensing and insurance
____________
____________
____________
____________
____________
Total cost
$
____________
$
____________
$
____________
$
____________
$
____________
--------------------------------------------------------------------------------
Requirement 2:
Compute the activity rates for the activity cost pools. (Omit the "$" sign in your response.)
Activity Cost Pool
Activity Rate
Removing asbestos
$
____________
per thousand square feet
Estimating and job setup
$
____________
per job
Working on nonroutine jobs
$
____________
per nonroutine job
--------------------------------------------------------------------------------
Requirement 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 to 2 decimal places. Omit the "$" sign in your response.)
(a)
A routine 2,000-square-foot asbestos removal job.
Total cost of the job
$
____________
Average cost per thousand square feet
$
____________
(b)
A routine 4,000-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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