Question

Q: Prepare profit reports for software and consulting assuming the company allocates costs using headcount, space occupied, and sales as allocation bases.

Q: Which provides the best information on profitability: a single overhead cost pool with headcount as the allocation base, or multiple cost pools using headcount, sales, and space occupied? Assume the controller’s assumptions are correct. A) Multiple Cost Pools OR B) Single overhead cost pool

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Problem 6-1 Ridgewood.com sells software and provides consulting services to companies that conduct business over the Internet. The company is organized into two lines of business (software and consulting), and profit statements are prepared as follows: Software Consulting Sales $15,125,500 $8,144,500 Less direct costs 5,800,000 4,220,000 Less allocated costs 5,040,000 1,740,000 Income before taxes $4,285,500 $2,184,500 Direct costs include costs that are easily associated with each line of business. For software, this includes the salary of programmers, the cost of computers used by programmers, and the cost of software manuals sold to customers. For consulting, direct costs include consultant salaries, computer costs, and travel costs. Allocated costs include costs that are not directly traced to the business units. These costs include employee benefits, rent, telecommunications costs, and general and administrative costs, such as the salary of the CEO of Ridgewood.com. At the start of 2017, allocated costs were estimated as follows: Employee benefits Rent Telecommunications General and administrative costs Total $2,300,000 940,000 531,000 3,009,000 $6,780,000 In the past, allocations have been based on headcount (the number of employees in each business unit). Software had 375 employees and consulting had 125 employees. The new controller of Ridgewood.com believes that the key driver of employee benefits and telecommunications costs is headcount. However, rent is driven by space occupied, and general and administrative costs are driven by relative sales. Ridgewood.com rents 43,000 square feet; approximately 21,500 is occupied by software employees and 21,500 by consulting personnel. Prepare profit reports for software and consulting assuming the company allocates costs using headcount, space occupied, and sales as allocation bases. Software Consulting LINK TO TEXT Which provides the best information on profitability: a single overhead cost pool with headcount as the allocation base, or multiple cost pools using headcount, sales, and space occupied? Assume the controller's assumptions are correct. provide(s) the best information on profitability.

Answer 1

Computation of Cost drivers Particulars S Cost per driver (A/B) 4,600 $ 21.86 1,062 Amount (A) 23,00,000 9,40,000 5,31,000 30,09,000 Employee Benefits Rent Telecommunications General & Admin costs Driver (B) 500 employees 43000 square feet 500 employees in ratio of sales Sales Software Consulting 15125500 8144500 23270000 % of total sales 65% 35% 100% Allocation of Costs Particulars Employee Benefits Rent Telecommunications General & Admin costs Software Consulting Amount Amount ($4600 x 375) $ 17,25,000 ($4600 x 125) $ 5,75,000 ($21.86 x 21,500) $ 4,70,000 ($21.86 x 21500) $ 4,70,000 ($1062 x 375) $ 3,98,250 ($1062 x 125) $ 1,32,750 ($3009000 x 65%) $ 19,55,850 ($3009000 x 35%) $10,53,150 $ 45,49,100 $ 22,30,900 Answer 1: Profit Reports for software and consulting - using drivers Software Consulting Sales $ 1,51,25,500 $ 81,44,500 less: Direct Costs 58,00,000 $ 42,20,000 Allocated Costs 45,49,100 $ 22,30,900 Income before taxes 47,76,400 $ 16,93,600 Answer 2: Multiple Cost pools provides best information on probability

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