Question

Colbert Associates prepares architectural drawings to conform to local structural-safety codes. (Click the icon to view the income statement.) (Click the icon to view the percentage of time spent on activities.) Assume administrative and support costs vary with professional-labor costs. Consider each requirement independently. Read the requirements. Requirement 1. How much of the total costs in 2017 are value-added, non-value-added, or in the gray area between? Explain your answers briefly. What actions can Colbert take to reduce its costs? Begin by calculating the total labor costs, then calculate the total costs. (If a box is not used in the table, leave the box empty; do not enter a zero. Round your answers to the nearest whole dollar.) Value- Gray Non-value Added Area -Added Total Making calculations and preparing drawings Checking calculations and drawings Correcting errors found in drawings Making changes in response to client requests Correcting errors to meet government building code Total professional labor costs

Answer 1

1.

	Value Added	Gray area	Non value added	Total	Working
Making calculations and preparing drawings	277,056			277,056	374,400*74%
checking calculations and drawings		18,720		18,720	374,400*5%
correcting errors found in drawings			22,464	22,464	374,400*6%
making changes in response to client request	26,208			26,208	374,400*7%
correcting error to meet government building code			29,952	29,952	374,400*8%
Total professional labor cost	303,264	18,720	52,416	374,400

2. The main purpose of classifying cost between value added cost and non value added cost is to reduce the non value added cost and increase the profits of the company. If we classifying non value added cost as value added cost then the focus on its reduction will not be there. And it will unnecessarily increase the the cost of the product or services.

In confusion we should adhere to the principle that will this cost be treated as value added or not from the customer's perspective.

3.

Operating Income

Particulars	Amount
Revenue	737,880
Salaries	321,984
Travel	14,000
Administrative and support cost	145,202
Total cost	481186
Operating Income	256,694

Working Notes

Salaries = 374,400 - 22,464 - 29,952 = 321,984

Administrative and support cost = (168,840/374,400)*321,984 =145,202

4. Total hours before elimination of correction cost = 7,800 hours

Total hours saved if elimination of correction cost = (22,464 + 29,952)/48 = 1,092 hours

Additionl revenue = (737,880/7,800)*1,092 = $103,303

Operating Income

Particulars	Amount
Revenue	841,183
Salaries	374,400
Travel	14,000
Administrative and support cost	168,480
Total cost	556,880
Operating Income	284,303