Part 2: Miami Valley Architects Inc. (20 points) Miami Valley Architects Inc. provides a wide range of engineering and architectural consulting services through its three offices in Columbus, Cincinnati, and Dayton, Ohio. The company allocates resources and bonuses to the three offices based on the net income reported for the period by each office. Presented below are the results for the 2019 fiscal year ($ in thousands) as originally calculated. 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 For over ten years, overhead items were accumulated in one overhead pool for the entire firm and then allocated to the three offices based on direct labor dollars. For fiscal 2019, this predetermined rate was $1.859 for every direct labor dollar incurred by an office. This overhead pool includes rent, depreciation, taxes, etc. regardless of which office incurred the expense. After examining the fiscal 2019 performance reports, management questioned the quality of the accounting information they were using to make decisions. It soon became apparent that many overhead items are not highly correlated with direct labor dollars. Management decided to make major changes in their accounting practices and assign costs based on direct tracing where possible and allocate the remaining costs as indirect overhead costs using Activity Based Costing (ABC). Results of New Accounting Practices An analysis of the costs previously classified as "overhead" revealed that facility sustaining costs for rent, utilities, depreciation, property taxes, etc. could be traced directly to the office where the costs were being incurred (s in thousands). Columbus Cincinnati Dayton Total Directly Traceable costs $180 $270 $177 $627 Activity based costing was used for the indirect costs that could not be traced directly to the office where the costs were incurred. Activity pools and activity drivers, calculated from the accounting records and staff surveys, are presented in the table on the next page! After implementing the accounting changes, the restated 2019 net incomes attributable to the Columbus, Cincinnati, and Dayton offices are $128,000: (542,000); and $109,000, respectively. # Activities by Location Activity Pools Cost Activity Driver $409,000 Direct Labor Dollars Columbus Cincinnati Dayton $382,413 $317,086 $317,188 General Administration Project Costing 6,000 3,800 3,500 $48,000 ||# of Timesheet Entries $139,000|# of Vendor Invoices 1,020 850 400 Accounts Payable/Receiving Accounts Receivable 588 444 96 $47,000 || # of Client Invoices $30,000 # of Employees 23 26 Payroll/Mail Sort & Delivery 18 Personnel Recruiting $38,000 ||# of New Hires 8 4 7 230 260 180 $14,000 ||# of Claims Filed 200 250 60 Employee Insurance Processing Proposals Accepted by Clients Sales Meeting & Sales Aids $139,000 ||# of Proposals Accepted Contracted $202,000 Sales $1,824,439 1,399,617 $571,208 Shipping $24,000 || # of Projects 99 124 30 Ordering 135 110 80 $48,000 ||# of Purchase Orders Duplicating Costs 162,500 146,250 65,000 $46,000 || # of Copies Duplicated Blueprinting $77,000 ||# of Blueprints 39,000 31,200 16,000 $1,261,000 Part 2: Miami Valley Architects Inc. (20 points) Miami Valley Architects Inc. provides a wide range of engineering and architectural consulting services through its three offices in Columbus, Cincinnati, and Dayton, Ohio. The company allocates resources and bonuses to the three offices based on the net income reported for the period by each office. Presented below are the results for the 2019 fiscal year ($ in thousands) as originally calculated. 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 For over ten years, overhead items were accumulated in one overhead pool for the entire firm and then allocated to the three offices based on direct labor dollars. For fiscal 2019, this predetermined rate was $1.859 for every direct labor dollar incurred by an office. This overhead pool includes rent, depreciation, taxes, etc. regardless of which office incurred the expense. After examining the fiscal 2019 performance reports, management questioned the quality of the accounting information they were using to make decisions. It soon became apparent that many overhead items are not highly correlated with direct labor dollars. Management decided to make major changes in their accounting practices and assign costs based on direct tracing where possible and allocate the remaining costs as indirect overhead costs using Activity Based Costing (ABC). Results of New Accounting Practices An analysis of the costs previously classified as "overhead" revealed that facility sustaining costs for rent, utilities, depreciation, property taxes, etc. could be traced directly to the office where the costs were being incurred (s in thousands). Columbus Cincinnati Dayton Total Directly Traceable costs $180 $270 $177 $627 Activity based costing was used for the indirect costs that could not be traced directly to the office where the costs were incurred. Activity pools and activity drivers, calculated from the accounting records and staff surveys, are presented in the table on the next page! After implementing the accounting changes, the restated 2019 net incomes attributable to the Columbus, Cincinnati, and Dayton offices are $128,000: (542,000); and $109,000, respectively. # Activities by Location Activity Pools Cost Activity Driver $409,000 Direct Labor Dollars Columbus Cincinnati Dayton $382,413 $317,086 $317,188 General Administration Project Costing 6,000 3,800 3,500 $48,000 ||# of Timesheet Entries $139,000|# of Vendor Invoices 1,020 850 400 Accounts Payable/Receiving Accounts Receivable 588 444 96 $47,000 || # of Client Invoices $30,000 # of Employees 23 26 Payroll/Mail Sort & Delivery 18 Personnel Recruiting $38,000 ||# of New Hires 8 4 7 230 260 180 $14,000 ||# of Claims Filed 200 250 60 Employee Insurance Processing Proposals Accepted by Clients Sales Meeting & Sales Aids $139,000 ||# of Proposals Accepted Contracted $202,000 Sales $1,824,439 1,399,617 $571,208 Shipping $24,000 || # of Projects 99 124 30 Ordering 135 110 80 $48,000 ||# of Purchase Orders Duplicating Costs 162,500 146,250 65,000 $46,000 || # of Copies Duplicated Blueprinting $77,000 ||# of Blueprints 39,000 31,200 16,000 $1,261,000