West Virginia Concepts provides a wide range of engineering and architectural consulting services through its three offices in Charleston, Morgantown, and Martinsburg. The company allocates resources and bonuses to the three offices based on the net income reported for the period. Following are the performance results for 2010:

Overhead items are accumulated in one overhead pool and allocated to the offices based on direct labor dollars. For 2010, this predetermined overhead rate was $1.90 for every direct labor dollar incurred. The overhead pool includes rent, depreciation, taxes, etc., 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 2010 performance reports. During a review of overhead costs, it became apparent that many items of overhead are not correlated with direct labor dollars as previously assumed. Management decided that applying overhead based on activity-based costing and direct tracing, when possible, should provide a more accurate picture of the profitability of each office. An analysis of the overhead revealed that the following dollars for rent, utilities, depreciation, and taxes could be traced directly to the office that incurred the overhead:

Activity pools and activity drivers were determined from the accounting records and staff surveys as follows:

a. How much overhead cost should be assigned to each office based on activity-based costing concepts?
b. What is the contribution of each office before subtracting the results obtained in (a)?
c. What is the profitability of each office using activity-based costing?
d. Evaluate the concerns of management regarding the traditional costing technique currentlyused.

Transcribed Image Text:

Charleston $1,500,000 (281,000) (382,000) (725,800) Morgantown Martinsburg Total Sales 1067000 $3,986,000 $1,419,000 421,000) (31 7,000) (185,000) (887,000 Less: Direct material Direct labor Overhead (325,000) (1,024,000) (602300 (617500) 945600) (60500) 129400 Net income S 111200 78,700 Charleston Morgantown Martinsburg Total Office overhead 195,000 $286,100 5203500 $684,600 NUMBER OF ACTIVITIES BY LOCATION Activity Pools General administration Project costing Accounts payable/receiving Accounts receivable Payroll/mail sort & delivery Personnel recruiting Employee insurprocessing Proposals Sales meetings, sales aids Shipping Activity Driver Charleston Morgantown Martinsburg S 409,000 Direct labor 386,346 48,000 #ortimesheet entries 6,300 1,035 572 34 305,010 4,060 874 429 39 4 273 245 $1,404,150 125 102 145,782 31,032 $325,344 3,640 391 #ofvendor invoices # of client invoices #Of employees # of new hires #Of insur. claims filed 139 000 47,000 30,000 38,000 14,000 27 238 195 202000 Contracted sales $1,821,600 100 126 160,734 38,790 189 60 $569,250 25 72 67,284 16,378 139,000 #Of proposals 24,000 48,000 46,000 77,000 1,261,000 #Of projects # of purchase orders # of copies duplicated #Of blueprints Duplicating costs Bluepinting