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Denny Asbestos Removal Company

I have several study questions that I need assistance with answering.

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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
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*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 %
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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.

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.

Activity Cost Pool Activity Rate
Removing asbestos $ ____________ per thousand square feet
Estimating and job setup $ ____________ per job
Working on nonroutine jobs $ ____________ per nonroutine job
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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.

(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 $ ____________

________________________________________

Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model. Data regarding the two products follow:

Product Direct labor hours Annual
production Total Direct
Labor Hours
XR7 0.2 DLHs per unit 20,000 Units 4,000 DLHs
ZD5 0.4 DLHs per unit 40,000 Units 16,000 DLHs
20,000 DLHs
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Additional information about the company follows:
a. Product XR7 requires $35 in direct materials per unit, and product ZD5 requires $25.
b. The direct labor rate is $20 per hour.
c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products. Manufacturing overhead totals $1,480,000 per year.
d. Product XR7 is more complex to manufacture than product ZD5 and requires the use of a special milling machine.
e. Because of the special work required in (d) above, the company is considering the use of activity based costing to apply overhead cost to products. Three activity cost pools have been identified and the first-stage allocations have been completed. Data concerning these activity cost pools appear below:

Estimated Total Activity
Activity Cost Pool Activity Measure Estimated
Total Cost XR7 ZDS Total
Machine setups Number of setups $ 180,000 150 100 250
Special milling Machine-hours 300,000 1,000 0 1,000
General factory Direct labor-hours 1,000,000 4,000 16,000 20,000
$ 1,480,000

Requirement 1:
Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.

(a) Compute the predetermined overhead rate.

Predetermined overhead rate $ ____________ Per DLH

(b) Determine the unit product cost of each product.. Round your answers to 2 decimal places.)

Model
XR7 ZDS
Total Unit product Cost $ ____________ $ ____________

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Requirement 2:
Assume that the company decides to use activity-based costing to apply overhead cost to products.

(a) Compute the activity rate for each activity cost pool. Also compute the amount of overhead cost that would be applied to each product. (Leave no cells blank - be certain to enter "0" wherever required. Round the Overhead cost per unit to 2 decimal places.

Activity cost Pool Activity Rate
Machine setups $ ____________ Per set up
Special milling $ ____________ Per MH
General factory $ ____________ Per DLH

Model XR7:
Activity Cost Pool Overhead
Applied
Machine setups $ ____________
Special milling ____________
General factory ____________
Total manufacturing overhead cost $ ____________
Overhead cost per unit $ ____________
________________________________________

Model ZD5
Activity Cost Pool Overhead
Applied
Machine setups $ ____________
Special milling ____________
General factory ____________
Total manufacturing overhead cost $ ____________
Overhead cost per unit ____________
________________________________________
(b) Determine the unit product cost of each product.. Round your answers to 2 decimal places.)

Unit product cost of Model XR7 $ ____________
Unit product cost of Model ZD5 $ ____________

________________________________________

AnimPix, Inc., is a small company that creates computer-generated animations for films and television. Much of the company's work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies.
The young founders of the company have become increasingly concerned with the economics of the business?particularly since many competitors have sprung up recently in the local area. To help understand the company's cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating storyboards and prototype stills to be shown to the prospective client. After the client has accepted a project, the animation goes into production and contract administration begins. Technical staff do almost all of the work involved in animation production, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures and rates are listed below:

Activity Cost Pool Activity Measure Activity Rate
Animation concept Number of proposals $ 5,300 per proposal
Animation production Minutes of animation $ 7,900 per minute of animation
Contract administration Number of contracts $ 5,600 per contract
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These activity rates include all of the costs of the company, except for the costs of idle capacity and organization-sustaining costs. There are no direct labor or direct materials costs.
Preliminary analysis using these activity rates has indicated that the local commercials segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask several companies like AnimPix to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at standard rates according to the running time of the completed animation, the revenues from these short projects tend to be below average. Data concerning activity in the local commercials market appear below:

Activity Measure Local Commercials
Number of proposals 24
Minutes of animation 15
Number of contracts 6
________________________________________
The total sales for local commercials amounted to $230,000.

Requirement 1:
Determine the cost of the local commercials market. (Think of the local commercials market as a product.)

Activity Cost Pool ABC Cost
Animation concept $ ____________
Animation production ____________
Contract administration ____________
Total Cost $ ____________
________________________________________
Requirement 2:
Compute the product margin of the local commercials market. (Remember, this company has no direct materials or direct labor costs.) (Negative amount should be indicated by a minus sign.

Product margin $ ____________

________________________________________

Gore Range Carpet Cleaning is a small, family-owned business operating out of Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $23.35 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers?particularly those located on more remote ranches that require considerable travel time. The owner's daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below:

Activity Cost Pool Activity Measure Activity for the Year
Cleaning carpets Square feet cleaned (00s) 14,000 hundred square feet
Travel to jobs Miles driven 49,500 miles
Job support Number of jobs 1,800 jobs
Other (costs of idle capacity and organization-sustaining costs) None Not applicable
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The total cost of operating the company for the year is $353,000, which includes the following costs:

Wages $ 149,000
Cleaning supplies 22,000
Cleaning equipment depreciation 10,000
Vehicle expenses 38,000
Office expenses 58,000
President's compensation 76,000
Total cost $353,000
________________________________________

Resource consumption is distributed across the activities as follows:

Distribution of Resource Consumption
Across Activity Cost Pools
Cleaning Carpets Travel to Jobs Job Support Other Total
Wages 78 % 12 % 0 % 10 % 100 %
Cleaning supplies 100 % 0 % 0 % 0 % 100 %
Cleaning equipment depreciation 66 % 0 % 0 % 34 % 100 %
Vehicle expenses 0 % 81 % 0 % 19 % 100 %
Office expenses 0 % 0 % 59 % 41 % 100 %
President's compensation 0 % 0 % 33 % 67 % 100 %
________________________________________

Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Requirement 1:
Prepare the first-stage allocation of costs to the activity cost pools. (Leave no cells blank - be certain to enter "0" wherever required.

Distribution of Resource Consumption
Across Activity Cost Pools
Cleaning Carpets Travel to Jobs Job Support Other Total
Wages $ ____________ $ ____________ $ ____________ $ ____________ $ ____________
Cleaning supplies ____________ ____________ ____________ ____________ ____________
Cleaning equipment depreciation ____________ ____________ ____________ ____________ ____________
Vehicle expenses ____________ ____________ ____________ ____________ ____________
Office expenses ____________ ____________ ____________ ____________ ____________
President's compensation ____________ ____________ ____________ ____________ ____________
Total $ ____________ $ ____________ $ ____________ $ ____________ $ ____________
________________________________________
Requirement 2:
Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.

Activity Cost Pool Activity Rate
Cleaning carpets $ ____________ per hundred square feet
Travel to jobs $ ____________ per mile
Job support $ ____________ per job

Requirement 3:
The company recently completed a 10 hundred square-foot carpet-cleaning job at the Lazy Bee Ranch?a 55-mile round-trip journey from the company's offices in Eagle-Vail. Compute the cost of this job using the activity-based costing system. (Round your answers to 2 decimal places.

Activity Cost Pool ABC Cost
Cleaning carpets $ ____________
Travel to jobs $ ____________
Job support $ ____________
Total $ ____________
________________________________________
Requirement 4:
The revenue from the Lazy Bee Ranch was $233.5 (10 hundred square-feet at $23.35 per hundred square feet). Compute the margin from this job. (Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.

Product Margin $ ____________

Requirement 5:
What do you conclude concerning the profitability of the Lazy Bee Ranch job?

(a) Gore Range Carpet Cleaning appears to be gaining money on the Lazy Bee Ranch job.
(b) Gore Range Carpet Cleaning appears to be losing money on the Lazy Bee Ranch job.

________________________________________

Pro Golf Corporation produces private label golf clubs for pro shops throughout North America. The company uses activity-based costing to evaluate the profitability of serving its customers. This analysis is based on categorizing the company's costs as follows, using the ease of adjustment color coding scheme described in Appendix 8A:

Ease of
Adjustment Code
Direct materials Green
Direct labor Yellow
Indirect labor Yellow
Factory equipment depreciation Red
Factory administration Red
Selling and administrative wages and salaries Red
Selling and administrative depreciation Red
Marketing expenses Yellow
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Management would like to evaluate the profitability of a particular customer?the Peregrine Golf Club of Eagle, Colorado. Over the last 12 months this customer submitted 2 order for 86 golf clubs that had to be produced in 3 batches due to differences in product labeling requested by the customer. Summary data concerning the order appear below:

Number of clubs 86
Number of orders 2
Number of batches 3
Direct labor-hours per club 0.35
Selling price per club $ 48
Direct materials cost per club $ 25.4
Direct labor rate per hour $ 22.5
________________________________________

A cost analyst working in the controller's office at the company has already produced the action analysis cost matrix for the Peregrine Golf Club that follows:

Action Analysis Cost Matrix for Peregrine Golf Club
Activity Cost Pools
Volume Batch Processing Order Processing Customer Service
Activity 24
direct labor-hours 3
batches 2
order 1
customer Total
Manufacturing overhead:
Indirect labor $ 38.6 $ 52.6 $ 5.4 $ 0 $ 96.6
Factory equipment depreciation 103.8 0.7 0 0 104.5
Factory administration 16.8 0.6 14 222 253.4
Selling and administrative overhead:
Wages and salaries 14 0 32 396 442
Depreciation 0 0 4 20 24
Marketing expenses 116.8 0 56 368 540.8
Total $ 290 $ 53.9 $ 111.4 $ 1,006 $ 1,461.3
________________________________________

Prepare an action analysis report showing the profitability of the Peregrine Golf Club. (Round your answers to 2 decimal places. Negative amount should be indicated by a minus sign.

Sales $ ____________
Green costs:
Direct materials $ ____________ ____________
Green margin ____________
Yellow costs:
Direct labor ____________
Indirect labor ____________
Marketing expenses ____________ ____________
Yellow margin ____________
Red costs:
Factory equipment depreciation ____________
Factory administration ____________
Selling and administrative wages and salaries ____________
Selling and administrative depreciation ____________ ____________
Red margin $ ____________
________________________________________

________________________________________

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________________________________________

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.

Removing Asbestos Estimating
and Job
Setup Working on Nonroutine
Jobs Other Total
Wages and salaries $ 80,000 $ 20,000 $ 70,000 $ 30,000 $ 200,000
Disposal fees 420,000 0 180,000 0 600,000
Equipment depreciation 40,000 0 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 38,000 190,000
Licensing and insurance 185,000 0 148,000 37,000 370,000
Total cost $ 777,000 $ 105,000 $ 499,000 $ 119,000 $ 1,500,000

Requirement 2:
Compute the activity rates for the activity cost pools.

Activity Cost Pool Activity Rate
Removing asbestos $ 1,554 per thousand square feet
Estimating and job setup $ 525 per job
Working on nonroutine jobs $ 19,960 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.

(a) A routine 2,000-square-foot asbestos removal job.

Total cost of the job $ 3,633
Average cost per thousand square feet $ 1,816.50

(b) A routine 4,000-square-foot asbestos removal job.

Total cost of the job $ 6,741
Average cost per thousand square feet $ 1,685.25

(c) A nonroutine 2,000-square-foot asbestos removal job.

Total cost of the job $ 20,485
Average cost per thousand square feet $ 10,242.50

________________________________________

Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model. Data ...

Solution Summary

This solution is comprised of a detailed explanation to perform the first-stage allocation of costs to the activity cost pools.

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