(1)Upon reviewing this thread I have to wonder what you told the dealer when you brought it in. If they were lead to believe that there was valve to piston contact (regardless of what the engine timing looked like when it arrived) they may have thought it prudent to pull the head and ensure there was no damage. Yes, they could have set the timing, seen the engine run, and sent you on your way. But if there was contact you may have been back with a dropped valve in a few hundred or few thousand miles.
(2)I don't think I have the full story here, and I'm not defending the dealer costs, but I do think they may have a reasonable rationale for what they did. If you were convinced there was no valve to piston contact and the engine was fine then you could have simply put on a new serp belt and driven on. But it didn't seem you were comfortable with that option, nor am I sure I would have been.
(3) These cars are far more difficult to work on than earlier cars. IIRC the hours allocated for a turbo R&R is about 16, compared to 4 or so for an ALH engined TDI. So the costs add up fast. Again, I'm not defending the charge, but I'm not surprised.
Please don't get defensive. I mean nothing personal, appreciate your comments, but I could not disagree more.
(1) WHAT? You don't assume anything, you verify. First they COULD HAVE put a new timing belt on and do a compression test or leak down test. (May be they did?) Second, there are bore scopes or small camera probes that are widely available, for not much money, they could stick through the injector or glow plug ports. You can look into the cylinder. His engine may have had internal damage, but what? If the valves were not bent, what was the issue?
(2) Sure you are making excuses. VW dealer service is legend, atrocious and well known for being expensive, poor to incompetent. I don't know the whole story here, and it is not fair to good VW mechanics. It's a stereotype, but a deserved one. I have stories. This forum is full of them. Your "rational" does not ring true to me. There may be reasons; kids don't want to take a trade, "Dirty Jobs", so dealers can't hire and retain good talent. However the VW dealers try to maximize profit and likely don't pay much. Why work for VW when they can more money at Chevy or Ford or Kia or Toyota, Honda and make more money on more reliable cars.... These brands have better reliability and customer satisfaction. VW is not in the top 10.... Sorry.
(3) No! That's rnot true. Sure a TURBO engine has more ducts and manifolds and other associated items. Sure there is a wiring harness and a computer; you need a diagnostic tool (which I bought for $400 + laptop). SO WHAT? It is not that hard to understand, and internal combustion, gasoline or diesel, is well understood for +100 years. Sure there are more probes and electronics to go wrong, but it's not rocket science or brain surgery, not magic. Now accessing parts to repair can be an issue; it is either tight or you have to take a lot of things off to do the job. For the VW you have to take the engine mount off and support the engine to change the timing belt! The DSG transmission service has you shoved oil up hill from the bottom and "burp" it at temperature. Could they make it more convoluted? Still it is not difficult. Time consuming yes! Oil change? You have to take a belly pan off and deal with a oil cartridge, so I use an oil suction tool through dip stick.
We can get into "German" VW design issues. Look at the picture I posted. Anything can get into the crank pulley and foul the timing belt. I have never seen anything so open and unprotected for such an important part as the timing belt on an interference engine. A shield on the back of the serpentine belt pulley would be easy and save it from jamming the timing belt (but there is limited room). They could extend the crank shaft and have the serpentine pulley mount direct (verses bolting Serp. pulley direct to the timing belt cog pulley), and then make a cover that really seals the area. Just because it is "German" does not mean lack of serious crap engineering/design.
This is CRAP~! I'll stop ranting, but bottom line there is a WHOLE LOT OF THINGS one can do before pulling a head to determine if there is damage.