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ACCT 386 - Week 5 - Homework - Question 2

ACCT 386 - Week 5 - Homework - Question 2
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ACCT 386 - Week 5 - Homework - Question 2

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Question 2

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 $6,000 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:

 Activity Cost Pool               

Activity Measure     

Total Activity           

  Removing asbestos

Thousands of square feet

460

 thousand square  feet  

  Estimating and job setup

Number of jobs

240

 jobs*

  Working on nonroutine jobs

Number of nonroutine jobs  

26

 nonroutine jobs

  Other (organization-sustaining
     and idle capacity costs)

None

   Not applicable


* 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.

  Costs for the Year

 

 

  Wages and salaries

$

196,000  

  Disposal fees

 

609,000  

  Equipment depreciation

 

23,000  

  On-site supplies

 

67,000  

  Office expenses

 

191,000  

  Licensing and insurance

 

367,000  

 



  Total cost

$

1,453,000  

 






 

Distribution of Resource Consumption Across Activities

 

 

Removing Asbestos

Estimating and Job Setup

Working on Nonroutine Jobs

Other

Total  

  Wages and salaries

33

%

10

%

28

%

29

%

100

%

  Disposal fees

73

%

0

%

27

%

 0

%

100

%

  Equipment depreciation

47

%

0

%

37

%

16

%

100

%

  On-site supplies

47

%

7

%

21

%

25

%

100

%

  Office expenses

11

%

32

%

25

%

32

%

100

%

  Licensing and insurance

50

%

0

%

37

%

13

%

100

%