Question

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.

Answer 1

Answer:

Mercer Asbestos should define the Cost Drivers first before introducing the Activity Based Costing System, cost drivers actually help the compnay to measure the cost per unit based on the contribution / impact of eac activity that had direct relation with the cost.  

Explanation:

Estimator should define the cost drivers such as labor, factory overhead  indicators and which has impact on the performance activity of both routine and non routine works.

Possible cost drivers for the below activities can be;

1. Removal of asbestos insulation around heating pipes in older homes. Likely cost drivers can be ( Direct Labor Hours Involved in the activity, Other indirect manpower hours dedicated for the activity)
2. Removal of asbestos-contaminated ceiling plaster in industrial buildings. Likely cost drivers can be ( Total covered area where contaminated ceiling plaster is present, Supervisors and other manpower involved in the activity).

Once the drivers have been defined cost/unit based on ABC system will help the decision makers such as Cost Planners to quote the accurate selling price to cover the profit margin.