Miami Valley Architects Inc. provides a wide range ofengineering and architectural consulting services through its threebranch offices in Columbus, Cincinnati, and Dayton, Ohio. Thecompany allocates resources and bonuses to the three branches basedon the net income reported for the period. Presented below are theresults 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 theentire firm and then allocated to the branches based on directlabor dollars. For fiscal 2016 this predetermined rate was $1.859for every direct labor dollar incurred by an office. The overheadpool includes rent, depreciation, taxes, etc. regardless of whichoffice incurred the expense. Management is concerned with theresults of the fiscal 2016 performance reports. During a review ofthe overhead, it became apparent that many items of overhead werenot correlated with the direct labor dollars. Management decided toapply overhead based on direct tracing where possible and to applyActivity Based Costing (ABC) to model the profitability of eachbranch. Results of Overhead Analysis An analysis of the overheadrevealed that facility sustaining costs for rent, utilities,depreciation, property taxes, etc. could be traced directly to theoffice where the costs were incurred ($ in thousands).
Columbus Cincinnatti Dayton Total Direct Overhead $180 $270 $177 $627
Activity pools and activity drivers determined from theaccounting 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 AccountsPayable/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 InsuranceProcessing $14,000 # of Claims Filed 230 260 180 Proposals Accepted byClients $139,000 # of Proposals Accepted 200 250 60 Sales Meeting / SalesAids $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
3. (In the first analysis the net incomes attributed tothe Columbus, Cincinnati, and Dayton offices were $127,000;$92,000; and, ($24,000), respectively. If profits for the officesare calculated using the ABC approach, the profits attributed tothe Columbus, Cincinnati, and Dayton offices are $128,000;($42,000); and, $109,000, respectively â these computations weremade to save you the need to spend time doing the arithmetic, theydo not need to be verified and you should accept these numbers ascorrect. )
After the reviewing the revised data, Don Johnson, thehead of Miami Valleyâs executive committee takes you out to lunchto discuss the committeeâs new plan for closing the Cincinnatioffice and continuing to serve some remaining loyal Cincinnaticlients from the Columbus office. Don begins the conversation bytelling you how you saved the company from making a disastrousmistake. Don said that the executive committee knew somethingwasnât right and before your ABC project Dayton was targeted forclosure within the next six months. Now, the numbers make it clearthat the problem is with the Cincinnati office and this is theoffice that should be closed within the coming six months. Don is aperson of action and he is ready to prune when and where pruning isneeded. The new ABC numbers show that Cincinnati is reporting anoperating loss of $42,000. Don believes that closing the Cincinnatioffice will avoid this loss and overall firm profit will increaseby $42,000 or more. Explain why a more careful study of the impactof closing Cincinnati must be undertaken because it is unlikelythat Donâs expected increase in firm profit of $42,000 willactually occur if Cincinnati is closed
Miami Valley Architects Inc. provides a wide range ofengineering and architectural consulting services through its threebranch offices in Columbus, Cincinnati, and Dayton, Ohio. Thecompany allocates resources and bonuses to the three branches basedon the net income reported for the period. Presented below are theresults for the 2016 fiscal year ($ 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 theentire firm and then allocated to the branches based on directlabor dollars. For fiscal 2016 this predetermined rate was $1.859for every direct labor dollar incurred by an office. The overheadpool includes rent, depreciation, taxes, etc. regardless of whichoffice incurred the expense. Management is concerned with theresults of the fiscal 2016 performance reports. During a review ofthe overhead, it became apparent that many items of overhead werenot correlated with the direct labor dollars. Management decided toapply overhead based on direct tracing where possible and to applyActivity Based Costing (ABC) to model the profitability of eachbranch. Results of Overhead Analysis An analysis of the overheadrevealed that facility sustaining costs for rent, utilities,depreciation, property taxes, etc. could be traced directly to theoffice where the costs were incurred ($ in thousands).
| Columbus | Cincinnatti | Dayton | Total | |
| Direct Overhead | $180 | $270 | $177 | $627 |
Activity pools and activity drivers determined from theaccounting 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 | ||
| AccountsPayable/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 InsuranceProcessing | $14,000 | # of Claims Filed | 230 | 260 | 180 | ||
| Proposals Accepted byClients | $139,000 | # of Proposals Accepted | 200 | 250 | 60 | ||
| Sales Meeting / SalesAids | $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 |
3. (In the first analysis the net incomes attributed tothe Columbus, Cincinnati, and Dayton offices were $127,000;$92,000; and, ($24,000), respectively. If profits for the officesare calculated using the ABC approach, the profits attributed tothe Columbus, Cincinnati, and Dayton offices are $128,000;($42,000); and, $109,000, respectively â these computations weremade to save you the need to spend time doing the arithmetic, theydo not need to be verified and you should accept these numbers ascorrect. )
After the reviewing the revised data, Don Johnson, thehead of Miami Valleyâs executive committee takes you out to lunchto discuss the committeeâs new plan for closing the Cincinnatioffice and continuing to serve some remaining loyal Cincinnaticlients from the Columbus office. Don begins the conversation bytelling you how you saved the company from making a disastrousmistake. Don said that the executive committee knew somethingwasnât right and before your ABC project Dayton was targeted forclosure within the next six months. Now, the numbers make it clearthat the problem is with the Cincinnati office and this is theoffice that should be closed within the coming six months. Don is aperson of action and he is ready to prune when and where pruning isneeded. The new ABC numbers show that Cincinnati is reporting anoperating loss of $42,000. Don believes that closing the Cincinnatioffice will avoid this loss and overall firm profit will increaseby $42,000 or more. Explain why a more careful study of the impactof closing Cincinnati must be undertaken because it is unlikelythat Donâs expected increase in firm profit of $42,000 willactually occur if Cincinnati is closed
