Survey Master Answers

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

$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

$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

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Survey Master Answers

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

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

Smallest 100 Projects

Step 2 Assigning the overhead costs to activity costs pool

Step 4 Assigning overhead costs to the projects

2. The Smallest 100 projects

Step 5 Prepare profitability report

Smallest 100 Projects

Smallest 100 Projects

Survey proposed &

Data collection &

Analysis & report

2006 The Largest

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