Icon.com sells software and provides consulting services to companies that condu

Question

Icon.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:

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 Icon.com.

At the start of 2014, allocated costs were estimated as follows:

n 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 Icon.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. Icon.com rents 40,000 square feet; approximately 20,000 is occupied by software employees and 20,000 by consulting personnel.

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

Software Consulting Sales $14,950,000 $8,050,000 Less direct costs 6,120,000 4,630,000 Less allocated costs 5,240,000 1,780,000 Income before taxes $3,590,000 $1,640,000

Explanation / Answer

WNI) ALLOCATION OF INDIRECT COST

SOFTWARE = $1854450

CONSULTING = $ 998550

REVISED PROFIT REPORT:

COST HEAD AMOUNT ($) COST DRIVER COST PER UNIT OF COST DRIVER Employee benefits 2600000 NO. OF EMPLOYEE = 500 $ 5200 PER EMPLOYEE Rent 1070000 AREA = 40000 SQ. FT. $ 26.75 PER Sq. Ft Telecommunication 497000 NO. OF EMPLOYEE = 500 $ 994 PER EMPLOYEE General and administrative cost 2853000 SALES RATIO = 1495 : 805

SOFTWARE = $1854450

CONSULTING = $ 998550

TOTAL 7020000

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