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 of the period. The results of the firm’s performance for the most recent year follows ($ 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 Miami Valley accumulates overhead items in one overhead pool and allocates it to the branches based on direct labor dollars. For this year, the predetermined overhead rate was $1.859 for every direct labor dollar incurred by an office. The overhead pool includes rent, depreciation, and taxes, regardless of which office incurred the expense. Some branch managers complain that the overhead allocation method forces them to absorb a portion of the overhead incurred by the other offices. Management is concerned with the recent operating results. During a review of overhead expenses, management noticed that many overhead items were clearly not correlated to the movement in direct labor dollars as previously assumed. Management decided that applying overhead based on activity-based costing and direct tracing wherever possible should provide a more accurate picture of the profitability of each branch. An analysis of the overhead revealed that the following dollars for rent, utilities, depreciation, and taxes could be traced directly to the office that incurred the overhead ($ in thousands): Columbus Cincinnati Dayton Total Direct overhead $ 180 $ 270 $ 177 $ 627 Activity pools and their corresponding cost drivers were determined from the accounting records and staff surveys as follows: General administration $ 409,000 Project costing 48,000 Accounts payable/receiving 139,000 Accounts receivable 47,000 Payroll/Mail sort and delivery 30,000 Personnel recruiting 38,000 Employee insurance processing 14,000 Proposals 139,000 Sales meetings/Sales aids 202,000 Shipping 24,000 Ordering 48,000 Duplicating costs 46,000 Blueprinting 77,000 $ 1,261,000 Cost Driver Amount of Cost Driver Use by Location Columbus Cincinnati Dayton Direct labor cost $ 382,413 $ 317,086 $ 317,188 Timesheet entries 6,000 3,800 3,500 Vendor invoices 1,020 850 400 Client invoices 588 444 96 Employees 23 26 18 New hires 8 4 7 Insurance claims filed 230 260 180 Proposals 200 250 60 Contracted sales 1,824,439 1,399,617 571,208 Projects shipped 99 124 30 Purchase orders 135 110 80 Copies duplicated 162,500 146,250 65,000 Blueprints 39,000 31,200 16,000 Required: 1. What overhead costs should be assigned to each branch based on ABC concepts? 2. What is the contribution of each branch before subtracting the results obtained in requirement 1? 3. What is the profitability of each branch office using ABC?

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 of the period. The results of the firm’s performance for the most recent year follows ($ 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 Miami Valley accumulates overhead items in one overhead pool and allocates it to the branches based on direct labor dollars. For this year, the predetermined overhead rate was $1.859 for every direct labor dollar incurred by an office. The overhead pool includes rent, depreciation, and taxes, regardless of which office incurred the expense. Some branch managers complain that the overhead allocation method forces them to absorb a portion of the overhead incurred by the other offices. Management is concerned with the recent operating results. During a review of overhead expenses, management noticed that many overhead items were clearly not correlated to the movement in direct labor dollars as previously assumed. Management decided that applying overhead based on activity-based costing and direct tracing wherever possible should provide a more accurate picture of the profitability of each branch. An analysis of the overhead revealed that the following dollars for rent, utilities, depreciation, and taxes could be traced directly to the office that incurred the overhead ($ in thousands): Columbus Cincinnati Dayton Total Direct overhead $ 180 $ 270 $ 177 $ 627 Activity pools and their corresponding cost drivers were determined from the accounting records and staff surveys as follows: General administration $ 409,000 Project costing 48,000 Accounts payable/receiving 139,000 Accounts receivable 47,000 Payroll/Mail sort and delivery 30,000 Personnel recruiting 38,000 Employee insurance processing 14,000 Proposals 139,000 Sales meetings/Sales aids 202,000 Shipping 24,000 Ordering 48,000 Duplicating costs 46,000 Blueprinting 77,000 $ 1,261,000 Cost Driver Amount of Cost Driver Use by Location Columbus Cincinnati Dayton Direct labor cost $ 382,413 $ 317,086 $ 317,188 Timesheet entries 6,000 3,800 3,500 Vendor invoices 1,020 850 400 Client invoices 588 444 96 Employees 23 26 18 New hires 8 4 7 Insurance claims filed 230 260 180 Proposals 200 250 60 Contracted sales 1,824,439 1,399,617 571,208 Projects shipped 99 124 30 Purchase orders 135 110 80 Copies duplicated 162,500 146,250 65,000 Blueprints 39,000 31,200 16,000 Required: 1. What overhead costs should be assigned to each branch based on ABC concepts? 2. What is the contribution of each branch before subtracting the results obtained in requirement 1? 3. What is the profitability of each branch office using ABC?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

	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

Miami Valley accumulates overhead items in one overhead pool and allocates it to the branches based on direct labor dollars. For this year, the predetermined overhead rate was $1.859 for every direct labor dollar incurred by an office. The overhead pool includes rent, depreciation, and taxes, regardless of which office incurred the expense. Some branch managers complain that the overhead allocation method forces them to absorb a portion of the overhead incurred by the other offices.

Management is concerned with the recent operating results. During a review of overhead expenses, management noticed that many overhead items were clearly 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 wherever 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, and taxes 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 their corresponding cost drivers were determined from the accounting records and staff surveys as follows:

General administration	$ 409,000
Project costing	48,000
Accounts payable/receiving	139,000
Accounts receivable	47,000
Payroll/Mail sort and delivery	30,000
Personnel recruiting	38,000
Employee insurance processing	14,000
Proposals	139,000
Sales meetings/Sales aids	202,000
Shipping	24,000
Ordering	48,000
Duplicating costs	46,000
Blueprinting	77,000
	$ 1,261,000

Cost Driver	Amount of Cost Driver Use by Location
Columbus	Cincinnati	Dayton
Direct labor cost	$ 382,413	$ 317,086	$ 317,188
Timesheet entries	6,000	3,800	3,500
Vendor invoices	1,020	850	400
Client invoices	588	444	96
Employees	23	26	18
New hires	8	4	7
Insurance claims filed	230	260	180
Proposals	200	250	60
Contracted sales	1,824,439	1,399,617	571,208
Projects shipped	99	124	30
Purchase orders	135	110	80
Copies duplicated	162,500	146,250	65,000
Blueprints	39,000	31,200	16,000