Question
Miami Valley Architects Inc. provides a wide range of engineering and architectural consulting services through its three branch offices in Columbus, Cincinnati, and Dayton, Ohio.
Miami Valley Architects Inc. provides a wide range of engineering and architectural consulting services through its three branch offices in Columbus, Cincinnati, and Dayton, Ohio. The company allocates resources and bonuses to the three branches based on the net income reported for the period. Presented below are the results for the 2016 fiscal year ($ in thousands).
Columbus | Cincinnati | Dayton | Total | |
Sales | $1,500 | $1,419 | $1,067 | $3,986 |
Less: | ||||
Direct Labor | (382) | (317) | (317) | (1,016) |
Direct Materials | (281) | (421) | (185) | (887) |
Overhead | (710) | (589)) | (589) | (1,888) |
Net Income | $127 | $92 | ($24) | $195 |
Overhead items are accumulated in one overhead pool for the entire firm and then allocated to the branches based on direct labor dollars. For fiscal 2016 this predetermined rate was $1.859 for every direct labor dollar incurred by an office. The overhead pool includes rent, depreciation, taxes, etc. regardless of which office incurred the expense. Management is concerned with the results of the fiscal 2016 performance reports. During a review of the overhead, it became apparent that many items of overhead were not correlated with the direct labor dollars. Management decided to apply overhead based on direct tracing where possible and to apply Activity Based Costing (ABC) to model the profitability of each branch. Results of Overhead Analysis An analysis of the overhead revealed that facility sustaining costs for rent, utilities, depreciation, property taxes, etc. could be traced directly to the office where the costs were incurred ($ in thousands).
Columbus | Cincinnatti | Dayton | Total | |
Direct Overhead | $180 | $270 | $177 | $627 |
Activity pools and activity drivers determined from the accounting records and staff surveys are presented in the table
Activity | By | Location | |||||
Activity Pools | Activity Driver | Columbus | Cincinnati | Dayton | |||
General Admission | $409,000 | Direct Labor Dollars | $382,413 | $317,086 | $317,188 | ||
Project Costing | $48,000 | # of Timesheet Entries | 6,000 | 3,800 | 3,500 | ||
Accounts Payable/Receivable | $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 | ||
Personell Recruiting | $38,000 | # of New Hires | 8 | 4 | 7 | ||
Employee Insurance Processing | $14,000 | # of Claims Filed | 230 | 260 | 180 | ||
Proposals Accepted by Clients | $139,000 | # of Proposals Accepted | 200 | 250 | 60 | ||
Sales Meeting / 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 |
1.) Activity based costing is one approach to the difficult problem of cost allocation. However, the results may still be arbitrary and too imprecise for some applications. Consider the case of a large, national architectural firm with offices located throughout the country. Assume this firm needs to establish a transfer price to charge different profit centers across the country for their use of a centralized Personnel Recruiting service located within a centralized Human Resources group. Using the example of Personnel Recruiting in this problem, discuss reasons why activity based costing as it is implemented in this model by Miami Valley Architects for Personnel Recruiting lacks the precision needed for the large, national architectural firm seeking to establish a transfer price.
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