Question

E13-18 (similar to) : Question Help O Carasco 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 Carasco 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- Added Gray Area Non-value -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 Enter any number in the edit fields and then click Check Answer. & parts O remaining Clear All Check Answer

Answer 1

1.
Classification of salary cost into activity cost based on the time spent on each activity
	% of time spent	Time spent in hours	Salary cost per hour	Salaries
Making calculations and preparing drawings	73%	5,621	$48	$269,808
Checking calculations and drawings	5%	385	$48	$18,480
Correcting errors found in drawings	7%	539	$48	$25,872
Making changes in response to client requests	6%	462	$48	$22,176
Correcting errors to meet government building code	9%	693	$48	$33,264
Total professional labor costs	100%	7,700		$369,600
Classification of professional salary cost
	Value- Added	Gray Area	Non-value Added	Total
Making calculations and preparing drawings	$269,808			$269,808
Checking calculations and drawings		$18,480		$18,480
Correcting errors found in drawings			$25,872	$25,872
Making changes in response to client requests	$22,176			$22,176
Correcting errors to meet government building code			$33,264	$33,264
Total professional labor costs	$291,984	$18,480	$59,136	$369,600
2.
The consequences of classifying non-value added cost as value added cost are enumerated hereunder:
(i) It leads to increase in operational inefficiencies as the non-value added costs are also billed to the
customer.
(ii) The cost of the services of the company becomes higher as the non-value added costs are not
identified and reduced.
(iii) The operating margins of the company would be reduced as the non-value added costs are not
identified and reduced.
When there is any doubt, we should classify the cost as non-value added costs which would result in a
much deeper analysis of that particular cost at the time of review and future budgeting activity so that a
better classification can be made based on the nature of activity associated with the cost.
3.
Current operating income	$168,648
Add:
Increase in operating income due to elimination of non-value added costs
Correcting errors found in drawings	$25,872
Correcting errors to meet government building code	$33,264
Operating income if Carasco could reduce professional labor costs by eliminating errors	$227,784
4.
Total revenues	$711,480
Professional labor hours spent to earn the revenues	7700
Revenue per professional labor hours	$92.40
Professional labor hours spent to earn the revenues	7,700
Less:Professional labor hours spent on non-value added activity
Correcting errors found in drawings	(539)
Correcting errors to meet government building code	(693)
Value added professional labor hours spent to earn the revenues	6,468
Total revenues	$711,480
Value added professional labor hours spent to earn the revenues	6,468
Revenue per professional labor hours	$110
Revenue that could have been earned did not spend time on non-value added activity
Total professional labor hours available	7,700
Potential revenue per professional labor hours	$110
Revenue that could have been earned did not spend time on non-value added activity	$847,000
Computation of operating income
Revenues	$847,000
Salaries of professional staff	$369,600
Travel cost	$18,000
Administrative and support costs	$155,232
Total costs	$542,832
Operating income	$304,168