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Q1 Comment on the analysis prepared by Linda Evans in Exhibit 2.

Why do smaller
projects appear to be more or at least equally profitable as larger projects?
-

She used the traditional product costing system to provide the analysis prepared in
Exhibit 2 as she used the salary as the basic for dividing the overhead expenses instead
of the using the related activities base costing system. The smaller projects appear to be
equally profitable as the larger projects as the paid salaries for the 2 types of projects
are equal that leads to wrong assigning for the overhead costs Cost distortion.
1. Overstating the overhead costs of the 20 largest projects that causes hidden
profit.
2. Understating the overhead costs of the smallest 100 projects that causes false
profits.

Q2 Use the information in Exhibit 3 on overhead spending and activities to


prepare analyses of the profitability of larger (20 projects) and smaller (100
projects) projects undertaken by Survey Masters in 2006. What are your
conclusions about the relationship between project size and project profitability?
Step 1 Define activities, activity cost, pools and measures
Activities
Survey proposed
& Design
Data collection &
tabulation
Analysis & report
preparation

Cost Drive
Trip

Size
160

Largest 20 Projects
50

Smallest 100 Projects


110

Day

4200

600

3600

Page

1300

250

1050

Step 2 Assigning the overhead costs to activity costs pool


Total overhead budget = 1,400,000 $ distributes on the 3 main activities
Step 3 Calculate activities charging rate
Activities
Survey proposed
& Design
Data collection &
tabulation
Analysis & report
preparation

Cost Drive
Trip

Activity Budget
$640,000

Activity size
160

Activity Rate
$4,000/Trip

Day

$370,000

4200

$88.095/Day

Page

$390,000

1300

$300/Page

Step 4 Assigning overhead costs to the projects


1. The Largest 20 projects
Activities
Survey proposed
& Design
Data collection &
tabulation
Analysis & report
preparation
Total

Activity done
50

Activity Rate
$4,000/Trip

OH Cost
$200,000

600

$88.095/Day

$52,858

250

$300/Page

$75,000
$327,858

2. The Smallest 100 projects


Activities
Survey proposed
& Design
Data collection &
tabulation
Analysis & report
preparation
Total

Activity done
110

Activity Rate
$4,000/Trip

OH Cost
$440,000

3600

$88.095/Day

$317,142

1050

$300/Page

$315,000
$1,072,142

Step 5 Prepare profitability report


Revenue
Salaries
OH Cost
Net Income

Largest 20 Projects
$1,300,000
($400,000)
($327,858)
$572,142

Smallest 100 Projects


$1,500,000
($400,000)
($1,072,142)
$27,858

The conclusion is the project size has direct relationship with the project profitability
Step 6 Prepare cost distortion report
Volume based costing system
Activity based costing system
Amount of cost distortion

Largest 20 Projects
$700,000
($327,858)
$372,142

Smallest 100 Projects


$700,000
($1,072,142)
($372,142)

Q3 Should Survey Masters continue to take all projects offered to the company?
Why or why not? On which size of project should they focus their sales efforts?
Should they refused to take on larger or smaller projects in the future? What
should be their strategy in selecting future projects to undertake with clients?
-

No, Survey Master should not continue to take all projects offered to the company. They
should focus on the large size project which has less overhead cost because it needs less
size of activities and higher return. If they accept the smaller project this will cause
declining in the company profit as it has lower return.

Profit Analysis

Total

Largest 20
Projects

Smallest 100
Projects

Revenue

$2,800,000

$1,300,000

$1,500,000

Salaries

($800,000)

($400,000)

($400,000)

OH Cost

($1,400,000)

($327,858)

($1,072,142)

$600,000

$572,142

$27,858

21%

44%

2%

Net Income
Return

Cost Analysis

Activities

Total

Largest 20
Projects

Largest 20
Projects %

Smallest
100
Projects

Smallest
100
Projects %

Survey proposed &


Design

$640,000

$200,000

31%

$440,000

69%

Data collection &


tabulation

$370,000

$52,858

14%

$317,142

86%

$390,000

$75,000

19%

$315,000

81%

$1,400,000

$327,858

23%

$1,072,142

77%

Analysis & report


preparation
Total

Q4 Suppose that Survey Masters decides to only take on larger client projects,
but not enlarge its professional staff (i.e maintain the level of project salaries at
800,000 $). Prepare a projection of income for 2007 for the strategy that you
proposed in question 3 above.
-

Supposing that the Survey Master decides to only take on larger client projects so the
current salaries of the Largest 20 projects will be duplicated and so for the overhead
costs and for the Total Revenue

2006 The Largest


20 Projects

2007

Revenue

$1,300,000

$2,600,000

Salaries

($400,000)

($800,000)

OH Cost

($327,858)

($655,716)

$572,142

$1,144,284

44%

44%

Net Income
Return