S and O Consultants Stephen Michaels and Luanne Taylor met at Country Hills Elem
ID: 2424635 • Letter: S
Question
S and O Consultants
Stephen Michaels and Luanne Taylor met at Country Hills Elementary School when they were young and talked about starting their own business when they grew up. In 2005, after they both graduated from college and worked a couple years they decided they would start their own consulting company, focusing on setting up SAP software applications for companies.
They started S and O Consultants as an equal partnership, considering incorporating later on. Through some very hard work, and the popularity of SAP applications, the company grew over a couple years to a point where they had 10 employees and plenty of opportunities. In 2009, they had earned revenues of approximately $3.5 million and net income of $750,000.
The focus of the company is to evaluate the current system of the company, install SAP applications for the company, incorporate the existing company data into the new SAP application, and train employees in the use of SAP applications. These four steps were included in every consultation project. In the past year, 2009, the company had completed 100 projects. An income statement for the past year, 2009, is shown in Table One.
Table One
S and O Consultants
Income Statement
For the Year Ended December 31, 2009
Projects completed
100
Project revenue
3,500,000
Consulting salaries
1,000,000
Overhead expenses
1,750,000
Total expenses
2,750,000
Net Income
750,000
Their consulting company in the past had taken every project offered to them. They wanted to build up a clientele, and overtime have built up a very good name within the consulting environment. They had worked very hard over the past couple of years putting in a lot of overtime, working most weekends, building up the company and the number of clients. They have gotten to a point where they want to work less and not take on every project; they can start to be choosy about which projects they decide to take on. Stephen and Luanne are trying to figure out which projects to choose, based upon which projects were the most profitable and the best use of their time. They have kept very good records, accumulating some very valuable information over the last couple of years, and would like to process that information to help them figure out which projects are the most profitable and which they should pursue in the future.
They hired a small business consultant, Makayla Carter, to help them try to figure out which projects are most profitable. Makayla categorized the projects by length of time to complete, going from shortest amount of time to longest amount of time. The total number of projects completed last year was 100. The total projects were separated into the 75 shortest and the 25 longest, based upon consulting salaries - the 75 shortest projects cost ½ of the total consulting salaries or $500,000 of the $1,000,000, and the 25 longest projects cost the other ½ of the total consulting salaries, or $500,000. As you can see from Table One, the 100 projects accumulated consulting salaries of $1,000,000 – this amount was easy to track. The overhead expense of $1,750,000 is not so easy to apply to the different size consulting projects. This information is needed to complete the processing of the information to determine which length projects are most profitable and should be pursued in the future. Makaya decides to use consulting salaries as the base to apply the overhead expense to the different length projects.
Using the standard costing method, the consulting salaries were used as the basis for separating the overhead into the shorter or longer projects. The resulting income statements are shown in Table Two. As indicated by table two, $1,925,000 revenue was generated by the 75 shorter projects, and $1,575,000 was generated by the 25 longer projects.
Table Two
S and O Consultants
Income Statement
For the Year Ended December 31, 2009
Longer projects
Shorter projects
Total
Projects completed
25
75
100
Project revenue
1,575,000
1,925,000
3,500,000
Consulting salaries
500,000
500,000
1,000,000
Overhead expenses
875,000
875,000
1,750,000
Total expenses
1,375,000
1,375,000
2,750,000
Net Income
200,000
550,000
750,000
Makayla was not confident in this information, based upon standard costing; she was not sure if this was completely accurate and providing the information they needed. She does not think that this information is a good indicator of which projects, shorter or longer, should be pursued. She decides that standard costing is not the appropriate way to go and that ABC costing would give much better information. The only problem is that she has to go all out of town for a conference that will not be able to complete this for Stephen and Luanne. She is asking for your assistance.
By re-categorizing the total overhead expenses of $1,750,000 further, the following activity based categories and their total overhead expenses and correlating physical measurements are provided in Table Three.
Table Three
Total Cost
Physical measurement
Longer
Shorter
Evaluation of the current system
of the company (Pages)
600,000
30,000
7,500
22,500
Install the SAP application software (Manhours)
350,000
500
100
400
Incorporate the existing company
data into the new SAP application software (Trips)
300,000
2,000
600
1,400
Train the employees of the company
and the use of SAP (Days)
500,000
500
75
425
Questions:
3. Apply the rates to the longer and shorter projects to calculate the total overhead cost for each. Calculate the net income for the shorter projects and the longer projects, similar to Table Two.
S and O Consultants
Income Statement
For the Year Ended December 31, 2009
Projects completed
100
Project revenue
3,500,000
Consulting salaries
1,000,000
Overhead expenses
1,750,000
Total expenses
2,750,000
Net Income
750,000
Explanation / Answer
Table Two
S and O Consultants
Income Statement
For the Year Ended December 31, 2009
Longer projects
Shorter projects
Total
Projects completed
25
75
100
Project revenue
1,575,000
1,925,000
3,500,000
Consulting salaries
500,000
500,000
1,000,000
Overhead expenses
1060000
1365000
2425000
Total expenses
1560000
1865000
3425000
Net Income
15000
60000
75000
particular total cost Longer Shorter Evaluation of current system 600000 150000 450000 install SAP software 350000 70000 280000 Incorporating existing co. data in SAP 300000 90000 210000 Train the employees for SAP 500000 750000 425000 total overheads 2425000 1060000 1365000Related Questions
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