Project analysis

一份关于为什么小工程的利润会大于大工程的分析报告,本文通过计算小工程的投入与收益差，大工程投入与收益差等等一系列的数据得出小工程的利润会大于大工程。

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 Cost Drive Size Largest 20 Projects Smallest 100 Projects
Survey proposed & Design Trip 160 50 110
Data collection & tabulation Day 4200 600 3600
Analysis & report preparation 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 Cost Drive Activity Budget Activity size Activity Rate
Survey proposed & Design Trip $640,000 160 $4,000/Trip
Data collection & tabulation Day $370,000 4200 $88.095/Day
Analysis & report preparation Page $390,000 1300 $300/Page



Step 4 Assigning overhead costs to the projects
1. The Largest 20 projects
Activities Activity done Activity Rate OH Cost
Survey proposed & Design 50 $4,000/Trip $200,000
Data collection & tabulation 600 $88.095/Day $52,858
Analysis & report preparation 250 $300/Page $75,000
Total $327,858

2. The Smallest 100 projects
Activities Activity done Activity Rate OH Cost
Survey proposed & Design 110 $4,000/Trip $440,000
Data collection & tabulation 3600 $88.095/Day $317,142
Analysis & report preparation 1050 $300/Page $315,000
Total $1,072,142

Step 5 Prepare profitability report
Largest 20 Projects Smallest 100 Projects
Revenue $1,300,000 $1,500,000
Salaries ($400,000) ($400,000)
OH Cost ($327,858) ($1,072,142)
Net Income $572,142 $27,858

The conclusion is the project size has direct relationship with the project profitability
Step 6 Prepare cost distortion report
Largest 20 Projects Smallest 100 Projects
Volume based costing system $700,000 $700,000
Activity based costing system ($327,858) ($1,072,142)
Amount of cost distortion $372,142 ($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)
Net Income $600,000 $572,142 $27,858
Return 21% 44% 2%

- 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%
Analysis & report preparation $390,000 $75,000 19% $315,000 81%
Total $1,400,000 $327,858 23% $1,072,142 77%


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)
Net Income $572,142 $1,144,284
Return 44% 44%


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