(ABC; product profitability) 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:
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Charleston
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Morgantown
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Martinsburg
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Total
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Sales
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$1,500,000
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$1,419,000
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$1,067,000
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$3,986,000
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Less: Direct material
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(281,000)
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(421,000)
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(185,000)
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(887,000)
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Direct labor
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(382,000)
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(317,000)
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(325,000)
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(1,024,000)
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Overhead
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(725,800)
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(602,300)
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(617,500)
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(1,945,600)
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Net income
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$ 111,200
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$ 78,700
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$ (60,500)
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$ 129,400
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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:
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Charleston
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Morgantown
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Martinsburg
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Total
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Office overhead
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$195,000
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$286,100
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$203,500
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$684,600
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Activity pools and activity drivers were determined from the accounting records and staff surveys as follows:
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NUMBER OF ACTIVITIES BY LOCATION
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Activity Pools
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Activity
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Charleston
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Morgantown
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Martinsburg
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General administration
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$ 409,000
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Direct labor
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$ 386,346
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$ 305,010
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$325,344
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Project costing
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48,000
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# of timesheet entries
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6,300
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4,060
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3,640
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Accounts payable/receiving
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139,000
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# of vendor invoices
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1,035
|
874
|
391
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Accounts receivable
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47,000
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# of client invoices
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572
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429
|
99
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Payroll/mail sort & delivery
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30,000
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# of employees
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34
|
39
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27
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Personnel recruiting
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38,000
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# of new hires
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8
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4
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8
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Employee insur. processing
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14,000
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# of insur. claims filed
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238
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273
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189
|
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Proposals
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139,000
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# of proposals
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195
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245
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60
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Sales meetings, sales aids
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202,000
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Contracted sales
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$1,821,600
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$1,404,150
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$569,250
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Shipping
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24,000
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# of projects
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100
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125
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25
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Ordering
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48,000
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# of purchase orders
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126
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102
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72
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Duplicating costs
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46,000
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# of copies duplicated
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160,734
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145,782
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67,284
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Blueprinting
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77,000
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# of blueprints
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38,790
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31,032
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16,378
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$1,261,000
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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 currently used.
