42. (Activity-based costing) Miami Valley Architects Inc. provides a wide range of engineering and architectural consulting services

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42. (Activity-based costing) Miami Valley Architects Inc. provides a wide range of engineering and architectural consulting services through its three branch offices in Columbus, Cincinnati, and Dayton. The company allocates resources and bonuses to the three branches based on the net income reported for the period.

The following presents the results of 2001 performance ($ in thousands).

Columbus Cincinnati Dayton Total Sales $1,500 $1,419 $1,067 $ 3,986 Less: Direct labor (382) (317) (317) (1,016)

Direct material (281) (421) (185) (887)

Overhead (710) (589) (589) (1,888)

Net income $ 127 $ 92 $ (24) $ 195 Overhead items are accumulated in one overhead pool and allocated to the branches based on direct labor dollars. For 2001, this predetermined overhead rate was $1.859 for every direct labor dollar incurred by an office. The overhead pool includes rent, depreciation, taxes, and so on, regardless of which office incurred the expense. This method of accumulating costs forces the offices to absorb a portion of the overhead incurred by other offices.

Management is concerned with the results of the 2001 performance reports.

During a review of the overhead, it became apparent that many items of overhead are not correlated to the movement in direct labor dollars as previously assumed. Management decided that applying overhead based on activity-

based costing and direct tracing, where possible, should provide a more accurate picture of the profitability of each branch.

An analysis of the overhead revealed that the following dollars for rent, utilities, depreciation, taxes, and so on, could be traced directly to the office that incurred the overhead ($ in thousands).

Columbus Cincinnati Dayton Total Direct overhead $180 $270 $177 $627 Activity pools and activity drivers were determined from the accounting records and staff surveys as follows:

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a. What overhead costs should be assigned to each branch based on activitybased costing concepts?

b. What is the contribution of each branch before subtracting the results obtained in part (a)?

c. What is the profitability of each branch office using activity-based costing?

d. Evaluate the concerns of management regarding the traditional costing technique currently used. (IMA adapted)

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Cost Accounting Traditions And Innovations

ISBN: 9780324180909

5th Edition

Authors: Jesse T. Barfield, Cecily A. Raiborn, Michael R. Kinney

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