Question

Assignment #2

After entering the required journal entries and completing the t-account updates, you are now ready to begin the cost accounting analysis. When delivering the assignment, Kevin asked that you carefully determine how Dodge Company should classify each cost on the income statement as either a direct or an indirect cost. This classification will help the partners understand how costs should respond based on decisions to restructure specific types of client work across the firm. Initially, this seemed to you to be a simple exercise of applying basic management accounting concepts. In fact, as you scan the long list of costs in the income statement which are described in the Appendix, you realize that, in reality, this will be a much more difficult task than you had anticipated.

Requirements

a) Analyze and classify each Dodge Company cost and expense listed in the income statement provided in Exhibit 2 and described in the Appendix as either direct or indirect by using the template below. If the cost seems to be mixed, make whatever assumption seems appropriate in order to classify a cost as direct, indirect, or mixed. For those costs that seem to be partially direct and partially indirect, simply list these costs as 50 percent direct and 50 percent indirect until further analysis and discussion can be done.

b) Provide a brief explanation to justify each classification. Note that Kevin has already analyzed and listed some of the costs in the Assignment #2 Template.

c) Provide a short overall discussion as to why it would be important for Dodge Company to perform this analysis and how Kevin could use the resulting information to better manage the two offices.

Type of Cost	Classification	Explanation
Professional Salaries	Direct	Salaries of professionals are specific to work done directly for the client (i.e. most hours worked are billable)
Clerical wages
Bonus pool
Promotion
Payroll taxes
Employee benefits
Building and Equipment Maintenance	Indirect	Maintenance costs are not directly related to work done speciically for clients
Licenses
Equipment rental
Depreciation & amortization
Training
Information technology
Dues and subscriptions
Insurance
Storage
Utilities
Bank interest & charges
Telephone
Office supplies & travel
Accounting & legal
Property taxes
Office rent
Rent income

Answer 1

Type of Cost	Classification	Explanation
Professional Salaries	Direct	Salaries of professionals are specific to work done directly for the client (i.e. most hours worked are billable)
Clerical wages	Mixed	Clerical wages related to specific work done for the client is direct.Clerical wages for general work like accounting is indirect
Bonus pool	Mixed	Bonus pool for direct salaries and wages are direct. Bonus pool for indirect wages are indirect
Promotion	Mixed	Promotion costs for particular work is direct.General promotion cost which cannot be identified with a particular work is indirect
Payroll taxes	Mixed	payroll taxes for direct salaries and wages are direct. Payroll taxes for indirect wages are indirect
Employee benefits	Mixed	Employee benefits for direct salaries and wages are direct. Employee benefits for indirect wages are indirect
Building and Equipment Maintenance	Indirect	Maintenance costs are not directly related to work done speciically for clients
Licenses	Indirect	These costs are not directly related with any specific work of client
Equipment rental	Indirect	These costs are similar to depreciation, not for vspecific work of client
Depreciation & amortization	Indirect	These costs are not for specific work of client
Training	Indirect	These costs are not for specific work of client
Information technology	Indirect	Benefit of this cost is shared by all the jobs for all clients
Dues and subscriptions	Indirect	Cannot be identified with specific work for a client
Insurance	Indirect	Cannot be identified with specific work for a client
Storage	Indirect	Cannot be identified with specific work for a client
Utilities	Indirect	Cannot be identified with specific work for a client
Bank interest & charges	Indirect	Cannot be identified with specific work for a client
Telephone	Indirect	Cannot be identified with specific work for a client
Office supplies & travel	50%direct50% indirect	50% of these expenses can be identified with specific work and 50% are for general purpose
Accounting & legal	Mixed	The costs that can be identified with specific clients are direct and others are indirect
Property taxes	Indirect	Cannot be identified with specific work for a client
Office rent	Indirect	Cannot be identified with specific work for a client
Rent income	Indirect	Cannot be identified with specific work for a client