Creighton Associates prepares architectural drawings to conform to local structural-safety codes.
Assume administrative and support costs vary with professional-labor costs. Consider each requirement independently.
X Data Table Its income statement for 2017 is as follows: $ 776,050 Revenues 448,200 Salaries of professional staff (8,300 hours * $54 per hour) Travel 22,000 188,244 Administrative and support costs 658,444 Total costs $ 117,606 Operating income Data Table The percentage of time spent by professional staff on various activities follows: 74 % 5 7 Making calculations and preparing drawings for clients Checking calculations and drawings Correcting errors found in drawings (not billed to clients) Making changes in response to client requests (billed to clients) Correcting own errors regarding building codes (not billed to clients) 6 8 100 % Total Requirement 1. How much of the total costs in 2017 are value-added, non-value-added, or in the gray area between? Explain your answers briefly. What actions can Creighton take to reduce its costs? Begin by calculating the total labor costs, then calculate the total costs. (If a box is not used in the table, leave the box empty; do not enter a zero. Round your answers to the nearest whole dollar.) Value Gray Non-value Added Area -Added Total Making calculations and preparing drawings 331668 331668 Checking calculations and drawings 22410 22410 Correcting errors found in drawings 31374 31374 Making changes in response to client requests 26892 268921 Correcting errors to meet government building code 26892 28892 Total professional labor costs 358560 22410 58266 439236 Administrative and support costs Travel Total Select the appropriate cost classification, then select the action that Creighton can take to reduce its costs. Doing calculations and responding to client requests for changes are non-value-added costs because customers do not perceive these costs as necessary for the service of preparing architectural drawings. Customers Costs incurred on correcting errors in drawings and making changes because they were inconsistent with building codes for them. Checking calculations and drawings 7. There for disagreement on these classifications, Creighton should seek to eliminate these costs by making sure Requirement 2. What are the consequences of misclassifying a non-value-added cost as a value-added cost? When in doubt, would you classify a cost as a value-added or non-value-added cost? Explain briefly. The consequences of misclassifying a non-value-added cost as a value-added cost are the managers: (Select two that apply.) A. Might not reduce a cost that supports activities a customer does not value. B. May hesitate to reduce these costs thinking that if they eliminate the cost it would reduce the value of customers experience from using the product or service. C. Might reduce costs that provide value or utility (usefulness) customer experiences believing these experiences are not important to the customer. D. Might try to reduce any costs that supports activities the customer does not value. When in doubt, would you classify a cost as a value-added or non-value-added cost? Explain briefly. When in doubt, a manager often classifies costs as a because it Requirement 3. Suppose Creighton could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional-labor costs. Calculate Creighton's operating income for 2017. (Round your answers to the nearest whole dollar.) Current operating income Cost savings in professional labor costs Cost savings in variable administrative and support costs Add: Total cost savings Operating income in 2017 if errors eliminated Requirement 4. Now suppose Creighton could take on as much business as it could complete, but it could not add more professional staff. Assume Creighton could eliminate all errors so that it does not need to spend any time correcting errors. Assume Creighton could use the time saved to increase revenues proportionately. Assume travel costs will remain at $22,000. Calculate Creighton's operating income for 2017. Revenues Professional labor costs Travel MI Administrative and support costs Total costs Operating income
