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 $1,261,000
1.) Activity based costing is one approach to thedifficult problem of cost allocation. However, the results maystill be arbitrary and too imprecise for some applications.Consider the case of a large, national architectural firm withoffices located throughout the country. Assume this firm needs toestablish a transfer price to charge different profit centersacross the country for their use of a centralized PersonnelRecruiting service located within a centralized Human Resourcesgroup. Using the example of Personnel Recruiting in this problem,discuss reasons why activity based costing as it is implemented inthis model by Miami Valley Architects for Personnel Recruitinglacks the precision needed for the large, national architecturalfirm seeking to establish a transfer price.
Miami Valley Architects Inc. provides a wide range ofengineering and architectural consulting services through its threebranch offices in Columbus, Cincinnati, and Dayton, Ohio. Thecompany allocates resources and bonuses to the three branches basedon the net income reported for the period. Presented below are theresults for the 2016 fiscal year ($ 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 |
1.) Activity based costing is one approach to thedifficult problem of cost allocation. However, the results maystill be arbitrary and too imprecise for some applications.Consider the case of a large, national architectural firm withoffices located throughout the country. Assume this firm needs toestablish a transfer price to charge different profit centersacross the country for their use of a centralized PersonnelRecruiting service located within a centralized Human Resourcesgroup. Using the example of Personnel Recruiting in this problem,discuss reasons why activity based costing as it is implemented inthis model by Miami Valley Architects for Personnel Recruitinglacks the precision needed for the large, national architecturalfirm seeking to establish a transfer price.
