(Activity-based costing) Kingston Inc. provides a wide range of engineering and architectural consulting services through its three branch offices in Sky, Ruene, and Wayne. The company allocates resources and bonuses to the three branches based on the net income reported for the period. The fol¬ lowing presents the results of 2007 performance.

Overhead items are accumulated in one overhead pool and allocated to the branches based on direct labor dollars. For 2007, this predetermined overhead rate was $1,859 for every direct labor dollar incurred by an office. The overhead pool includes rent, depreciation, taxes, and so on regardless of which office incurred the expense. This method of accumulating costs forces the offices to absorb a portion of the overhead incurred by other offices.
Management is concerned with the results of the 2007 performance reports. During a review of the overhead, it became apparent that many items of overhead are not correlated to the movement in direct labor dollars as previously assumed. Management decided that applying overhead based on activity-based costing and direct tracing, when possible, should provide a more accurate picrtire of the profitability of each branch. An analysis of the overhead revealed that the following dollars for rent, utilities, depreciation, and taxes could be traced directly to the office that incurred the overhead.

a. How much overhead cost should be assigned to each branch based on activity-based costing concepts?

b. What is the contribution of each branch before subtracting the results obtained in part (a)?

c. What is the profitability of each branch office using activity-based costing?

d. Evaluate the concerns of management regarding the traditional costing technique currently used.
(IMA adapted)

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Sky Ruene Sales Less: Direct labor $1,500,000 $1,419,000 (382,000) (317,000) Direct material (281,000) (421,000) Overhead Net income (710,000) $ 127,000 (589,000) $ 92,000 (317,000) (185,000) (589,000) $ (24,000) Total $ 3,986,000 (1,016,000) (887,000) (1,888,000) $ 195,000 Wayne $1,067,000