ACCT 6344 Financial Statement Analysis and Income Statement
Answer:
Comparative Income Statement:
| Comparative Income Statement: | ||||||
|
Taejon Branch | ||||||
|
Whole Company |
Traditional Method |
ABC Method | ||||
|
Particulars |
2007 |
2008 |
2007 |
2008 |
2007 |
2008 |
|
Revenues |
$203,500,000 |
$227,800,000 |
$23,600,000 |
$33,200,000 |
$23,600,000 |
$33,200,000 |
|
Total Direct Costs |
($12,600,000) |
($17,700,000) |
($12,600,000) |
($17,700,000) | ||
|
Indirect Costs: | ||||||
|
IT Team Overhead- | ||||||
|
Branch PC Maintenace |
$5,300,000 |
$4,800,000 |
($614,644) |
($699,561) |
($416,284) |
($325,976) |
|
Headquarter IT System Support |
$3,600,000 |
$7,700,000 |
($417,494) |
($1,122,212) |
($417,494) |
($1,122,212) |
|
Branch IT System Support |
$5,100,000 |
$7,600,000 |
($591,450) |
($1,107,638) |
($591,450) |
($1,107,638) |
|
Employee Training |
$4,400,000 |
$4,200,000 |
($510,270) |
($612,116) |
($328,597) |
($157,107) |
|
OS Team- | ||||||
|
Training of Sales People |
$5,300,000 |
$7,100,000 |
($772,432) |
($1,034,767) |
($347,330) |
($489,173) |
|
Operating Performance Evaluation & Reporting |
$1,100,000 |
$700,000 |
($160,316) |
($102,019) |
($110,000) |
($70,000) |
|
Handling Traffic Accident Cases |
$11,700,000 |
$16,400,000 |
($1,705,180) |
($2,390,167) |
($1,233,984) |
($957,439) |
|
Investment Team- | ||||||
|
Equity Investment |
$7,400,000 |
$7,600,000 |
($1,078,490) |
($1,107,638) | ||
|
Debt Investment |
$3,600,000 |
$4,200,000 |
($524,671) |
($612,116) | ||
|
Investment Performance Evaluation & Reporting |
$800,000 |
$700,000 |
($116,594) |
($102,019) | ||
|
Marketing Team- | ||||||
|
Advertisement |
$7,900,000 |
$8,900,000 |
($1,151,361) |
($1,297,103) | ||
|
New Product/Channel Development |
$2,100,000 |
$3,800,000 |
($306,058) |
($553,819) | ||
|
GA Team- | ||||||
|
Payroll Administration |
$1,600,000 |
$1,400,000 |
($233,187) |
($204,039) |
($119,490) |
($52,369) |
|
Performance Evaluation |
$1,700,000 |
$1,900,000 |
($247,761) |
($276,910) |
($126,958) |
($71,072) |
|
Education & Training |
$4,500,000 |
$5,100,000 |
($655,838) |
($743,284) |
($336,066) |
($190,773) |
|
Headquarters Building Maintenance |
$2,300,000 |
$2,500,000 |
($335,206) |
($364,355) | ||
|
Branch Building Maintenance |
$4,600,000 |
$4,800,000 |
($670,413) |
($699,561) | ||
|
Total Indirect Costs |
($10,091,364) |
($13,029,324) |
($4,027,653) |
($4,543,761) | ||
|
Total Branch Cost |
($22,691,364) |
($30,729,324) |
($16,627,653) |
($22,243,761) | ||
|
Branch Operating Profit |
$908,636 |
$2,470,676 |
$6,972,347 |
$10,956,239 | ||
|
Operating Profit Margin |
3.85% |
7.44% |
29.54% |
33.00% | ||
Analysis of the Income Statement:
Kim had tried to reduce the branch overhead costs by controlling various cost drivers. He had reduced the numbers of employees and number of accidents for savings various employee related expenses and costs for handling accident cases. However, as the company used to allocate the overheads on the basis of branch revenues, more the branches would generate revenues, more it would have to bear the overhead costs. Therefore, Taejon branch could not enjoy the benefit of reduction of various cost drivers, inspite of increase in revenues.
Under activity-based costing method, the overhead costs are allocated on the basis of individual cost drivers. The individual cost drivers are closely related with the cost activities. Therefore, the overhead allocation process under this method provides effective outcomes, which can evaluate the branch performance more efficiently (DRURY, 2013).
From the above table, it is clearly visible that the efforts, given by Kim to reduce the overhead costs, have failed to increase the branch profits under traditional method. On the other hand, income statement under activity-based costing method exhibits that the effort of Kim has been able to reduce some of the overhead costs successfully. Moreover, it does not incorporate many headquarter overhead expenses, which do not have any relation with the branch operation. As result, the profit margins for both the years under this method are significantly higher than that of the traditional method (Simons, 2013).
Hence, it can be stated from the above discussion that the activity-based costing method provides best advantage to evaluate Kim’s performance.
Workings:
|
Overhead Cost Allocation under Activity-Based Costing (ABC): | |||||
|
Whole Company |
Taejon Branch | ||||
|
Team |
Activity |
2007 |
2008 |
2007 |
2008 |
|
IT |
Nos. of PCS |
522 |
589 |
41 |
40 |
|
Branch PC Mainteance |
$5,300,000 |
$4,800,000 |
$416,284 |
$325,976 | |
|
Revenue |
$203,500,000 |
$227,800,000 |
$23,600,000 |
$33,200,000 | |
|
Headquarter IT System Support |
$3,600,000 |
$7,700,000 |
$417,494 |
$1,122,212 | |
|
Branch IT System Support |
$5,100,000 |
$7,600,000 |
$591,450 |
$1,107,638 | |
|
Nos. of Employees |
1098 |
1203 |
82 |
45 | |
|
Employee Training |
$4,400,000 |
$4,200,000 |
$328,597 |
$157,107 | |
|
Total IT Overhead |
$18,400,000 |
$24,300,000 |
$1,753,824 |
$2,712,934 | |
|
OS |
Nos. of Sales Person |
412 |
508 |
27 |
35 |
|
Training of Sales People |
$5,300,000 |
$7,100,000 |
$347,330 |
$489,173 | |
|
Nos. of Branches |
10 |
10 |
1 |
1 | |
|
Operating Performance Evaluation & Reporting |
$1,100,000 |
$700,000 |
$110,000 |
$70,000 | |
|
Nos. of Accidents |
512 |
531 |
54 |
31 | |
|
Handling Traffic Accident Cases |
$11,700,000 |
$16,400,000 |
$1,233,984 |
$957,439 | |
|
Total OS Overhead |
$18,100,000 |
$24,200,000 |
$1,691,314 |
$1,516,612 | |
|
GA |
Nos. of Employees |
1098 |
1203 |
82 |
45 |
|
Payroll Administration |
$1,600,000 |
$1,400,000 |
$119,489.98 |
$52,369.08 | |
|
Performance Evaluation |
$1,700,000 |
$1,900,000 |
$126,958.11 |
$71,072.32 | |
|
Education & Training |
$4,500,000 |
$5,100,000 |
$336,065.57 |
$190,773.07 | |
|
Total General & Administrative Overhead |
$7,800,000 |
$8,400,000 |
$582,514 |
$314,214 | |
Reference & Bibliography:
DRURY, C. M. (2013). Management and cost accounting. Springer.
Kaplan, R., & Anderson, S. R. (2013). Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.
Simons, R. (2013). Performance Measurement and Control Systems for Implementing Strategy Text and Cases: Pearson New International Edition. Pearson Higher Ed
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons
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