Problem 6-1

Icon.com sells software and provides consulting services to companies that conduct business over the Internet. The company is organized into two lines of business (software and consulting), and profit statements are prepared as follows:

		Software			Consulting
Sales		$14,989,000			$8,071,000
Less direct costs		6,180,000			4,410,000
Less allocated costs		5,160,000			1,750,000
Income before taxes		$3,649,000			$1,911,000

Direct costs include costs that are easily associated with each line of business. For software, this includes the salary of programmers, the cost of computers used by programmers, and the cost of software manuals sold to customers. For consulting, direct costs include consultant salaries, computer costs, and travel costs. Allocated costs include costs that are not directly traced to the business units. These costs include employee benefits, rent, telecommunications costs, and general and administrative costs, such as the salary of the CEO of Icon.com. At the start of 2014, allocated costs were estimated as follows:

Employee benefits		$2,500,000
Rent		1,020,000
Telecommunications		517,000
General and administrative costs		2,873,000
Total		$6,910,000

In the past, allocations have been based on headcount (the number of employees in each business unit). Software had 450 employees and consulting had 150 employees. The new controller of Icon.com believes that the key driver of employee benefits and telecommunications costs is headcount. However, rent is driven by space occupied, and general and administrative costs are driven by relative sales. Icon.com rents 39,000 square feet; approximately 19,500 is occupied by software employees and 19,500 by consulting personnel. Prepare profit reports for software and consulting assuming the company allocates costs using headcount, space occupied, and sales as allocation bases.

		Software		Consulting
Income before taxesSalesDirect costsAllocated costs		$		$
AddLess:
Allocated costsSalesIncome before taxesDirect costs
Income before taxesSalesDirect costsAllocated costs
Direct costsAllocated costsIncome before taxesSales		$		$