Icon.com sells software and provides consulting services to companies that conduct business over the internet .The companies is organized into two lines of business (software and consulting),and profit statement are prepared are as follows:
software consulting
sales $12,000,000 $7,000,000
less direct cost 6,000,000 4,000,000
less allocated costs 4,000,000 2,000,000
income before taxes $2,000,000 $1,000,000
direct cost include costs that are easily associated with each line of business.For software ,this include the salary of programmers ,the cost of computer used by programmers ,and the cost of CD's sold to customer .For consulting,direct cost include consultants salaries ,computer cost and travel cost.Allocated cost include cost that are not directly traced to the business units.These cost include employee benefits ,rent telecommunication costs,and general and administrative costs such as the salary of the CEO of Icon.com.
At the start of 2011,allocated cost were estimated are as follows:
Employee benefits $2,000,000
Rent $700,000
Telecommunications $300,000
general and administrative costs $3,000,000
TOTAL $6,000,000
In the past,allocation 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 telecommunication cost is headcount .However,rent is driven by relatives sales .Icon.com rents 40,000 square feet;approximately 20,000 is occupied by software employees and 20,000by consulting personnel.
REQUIRED
a)Prepare profit reports for software and consulting assuming the company allocates costs using headcount ,space occupied ,and sales as allocation bases.Compare the new levels of profit to the levels that result using a single allocation base(headcount).Round to six decimal places.
b)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?