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:

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)

Transcribed Image Text:

# OF ACTIVITIES BY LOCATION Activity Pools General Administration Project Costing Activity Driver Columbus Cincinnati Dayton $ 409,000 Direct Labor $ 382,413 317,086 317,188 48,000 # of Timesheet Entries 6,000 3,800 3,500 Accounts Payable/Receiving 139,000 # of Vendor Invoices 1,020 850 400 Accounts Receivable 47,000 # of Client Invoices 588 444 96 Payroll/Mail Sort & Delivery 30,000 # of Employees 23 26 18 Personnel Recruiting 38,000 # of New Hires 8 4 7 Employee Insurance Processing 14,000 Insurance Claims Filed 230 260 180 Proposals 139,000 # of Proposals 200 250 60 Sales Meetings/Sales Aids 202,000 Contracted Sales 1,824,439 1,399,617 571,208 Shipping 24,000 # of Projects 99 124 30 Ordering 48,000 # of Purchase Orders 135 110 80 Duplicating Costs 46,000 # of Copies Duplicated 162,500 146,250 65,000 Blueprinting 77,000 # of Blueprints 39,000 31,200 16,000 $1,261,000