51. LO. 4 & LO.

5 (ABC; product profitability) Delgado Design provides a wide range of

engineering and architectural consulting services through its three offices in Altamount, Ballard and
Circleville. 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 2013:

Sales
Less: Direct
Material
Direct Labor
Overhead
Net Income

Altamount

1,500,000
-281,000
-382,000
-725,800

111,200

Ballard

1,419,000

Circleville

1,067,000

Total

3,896,000

-421,000
-317,000
-602,300

78,700

-185,000
-325,000
-617,500

60,500

-887,000
-1,024,000
-1,945,600

129400

Overhead items are accumulated in one overhead pool and allocated to the offices based on
direct labor dollars. For 2013, 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 2013 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.

Office
Overhead

Altamo
Circlevi
unt
Ballard
lle
Total

195,000 286,100 203,500 684,600

Activity pools and

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

Activity Pools
General
Administration

Activity
Driver

409,000

Direct Labor

# of timesheet
Project costing
48,000 entries
Accounts
# of vendor
Payable/receiving 139,000 invoices

Accounts
Receivable
Payroll/mail sort
& delivery
Personnel
recruiting
Employee Insurance
Processing

Proposals
Sales Meetings,

38,000

# of client
invoices
# of
employees
# of new
hires

14,000

# of insurance
claims field

47,000
30,000

# of
139,000 proposals
202,000 Contracted

Altamo
Circlevi
unt
Ballard
lle

386,000 305,010 325,344

6,300

4060

1,035

874

391

572

429

99

34

39

27

238

273

189

195

245

60

1,821,6

3,640

569,

Sales Aids
Shippinh

24,000

Ordering

48,000

Duplicating Costs

46,000

Blueprinting

77,000

Sales
# of projects
# of purchase
orders
# of copies
duplicated

# of
blueprints

1,404,15
0

00

250

100

125

25

126

102

72

160,734 145,782 67,284

16,
38,790 31,032 378

1,261,000
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.

A. How much overhead cost should be assigned to each office based on activity based costing
concepts?

Altamo
unt
General
155,20
Administration
0
Project costing
21,600
Accounts
Payable/receiving
62,550
Accounts
Receivable
24,440
Payroll/mail sort
& delivery
10,200
Personnel
recruiting
15,200
Employee Insurance
Processing

Proposals
Sales Meetings,
Sales Aids
Shipping
Ordering
Duplicating Costs
Blueprinting
total
direct overhead

Circlevi
lle

Ballard
122, 700

130,

880

13,920

12,480

52,280

23,630

18,330

4,230

11,700

8,100

7,600

15,200

4,760
54,210

5,460
68,110

3,780
16,680

96,960
9,600
20,160
19,780
34,650

74,740
12,000
16,320
17,940
27,720

30,300
2,400
11,520
8,280
14,630

529,530
195,000

449,360 282,110
286,100 203,500

total overhead

724,530

735,460 485,610

B. What is the contribution of each office before subtracting the results obtained in (a)?

Altamo
unt
Sales
Direct Labor
Direct Material
Net Contribution

1, 500,
000

382,000
281,000
837,000

Ballard

1,419,000

-317,000
-421,000
681,000

Circlevi
lle

1,067,000

325,000
185,000
557,000

C. What is the profitability of each office using activity based costing?

Altamo
unt
Net Contribution

837,000

Overhead

724,530

Contribution

112,
470

Ballard
681,000

-735,460
54,460

Circlevi
lle

557,000

485,610

71,390

D. Evaluate the concerns of management regarding the traditional costing technique currently
used.

Concerning traditional costing technique, Circleville office is has

most profitability among the three. On the other hand, Ballard office
is less profitable.

39. Sailaway has changed its product line from general paints to specialized
marine coatings, which has caused overhead costs to double. Costs affected
include customer service, production scheduling, inventory control, and
laboratory work. The company has decided to analyze and update its cost
information and pricing practices. Although some large orders are still
received, most current business is generated from products designed and
produced in small lot sizes to meet specifically detailed environmental and
technical requirements. Management believes that large orders are being
penalized and small orders are receiving favorable cost (and, thus, selling
price) treatment.

A. Indicate why the shift in product lines would have caused such major
increases in overhead.
When variety in product increases, apparently, the cost will increase
also therefore the special orders will increase cost in every transaction
happens.
B. Is it possible that management is correct in its belief about the costs of
large and small orders? If so, why?
Definitely! For total overhead costs are allocated to products with single
allocation basis such as direct labor or machine hours. With these, they
wont reflect to the cost drivers and overhead costs.
C. Write a memo to management suggesting how it might change the cost
accounting system to reflect the changes in the business.
By using overhead allocation base and activity based costing might
change the cost accounting system