O'Brian & McKinney (OM) is a public relations (PR) firm that represents elite athletes and celebrities. Tom O'Brian and Kate McKinney founded the firm in 2000, and since then the firm has grown dramatically. As of July 2017, OM's annual revenue exceeds $8 million dollars. Lately, the business has been under pressure. Competition has increased, and multiple PR firms have entered the space. Cash flow is very tight, and profit margins are lower than the industry average. During 2017 OM has lost 9 important clients and the relationship between Kate and Tom is very tense, since Tom is advocating for personnel reduction, while Kate is not. On Thursday, November 16 of 2017 at around 4:40 PM, Kate McKinney just ended a difficult conversation with Russell Brady (2017 NFA MVP). Russell is very upset and expressed that he is inclined to end his relationship with OM, since he argues that he has been overcharged. OM billed Russell more than $50,000 for September & October 2017 and Russell thinks this is an excessive amount since other quarterbacks pay $30,000 or less for similar services. Kate assures Russell that she will investigate to find out what is happening. John Goodfellow is the Account Executive in charge of Russell's account and Kate is concerned that John might have been overbilling Russell. She looks at the hours billed to Russell and concludes that they are reasonable, and comparable to other players; so, she decides to talk to the Controller, Mr. Loveless, to see if he can explain. When she gets to the Accounting Department Kate finds that the Controller is already gone for the day, and the only person still working at the Accounting department is young new hire: Dinesh Kumar. She introduces herself to Dinesh and explains that she needs to understand why Russell Brady is being charged so much since the number of hours billed is comparable to other clients who do not get charged as much. Dinesh tells her that he will work on it immediately and promises an answer by the next day, Friday morning. Early morning on Friday, November 17, Tom O'Brian had a great conversation with Colin Bennet who called to renew his contract with O'Brian & McKinney. Collin has been going through a difficult situation since he has chosen not to stand for the National Anthem ceremony that occurs before each game. Collin position is to draw public attention to recent incidents of police brutality against African Americans, and his stance has created a lot of controversy. Colin is very happy with OM's representation which has been very effective at managing all the press that his actions have generated. Danielle Chen, is the Account Executive managing Collin's account and Tom wants to promote Danielle and give her a performance bonus. Soon after, at 11:30am, Tom learns through his assistant that Russell Brady has been talking to other PR firms. Tom is concerned, since he hasn't heard anything from Kate. Tom calls Kate and demands an explanation. Kate explains that she is expecting a report from the Accounting Department and that she will discuss at the partners' meeting later that day at 2:00pm. Tom demands that Kate fire John immediately and that the account be transferred to him so that Danielle Chen can take over, since Danielle had been successfully managing Colin's Bennet account. Kate responds that she would like to wait until she gets all the information before she fires anybody. Tom reluctantly agrees. Dinesh worked through the night. He found that his boss (the Controller: Mr. Loveless) had been using a very simple indirect costing system based on a single direct-cost category (professional labor-hours) to allocate overhead (OH). Dinesh decided to look at the indirect costs more closely applying an activity based costing (ABC) allocation system. After running the numbers, he was shocked. It was clear that the entire costing/billing system was very flawed, and that Russell Brady had been overcharged while Colin Bennet had been under-charged. Mr. Loveless found out about what Dinesh had been doing and went to Dinesh to ask him why he hadn't been notified. He looked at the report and he was furious, since he had been working at OM for more than 15 years and he was sure that the costing/billing was correct. Mr. Loveless told Dinesh to stop communicating with Kate since he wanted to take care of the matter. Soon after, Kate called and Dinesh explained that there were some problems with the costing and billing system and that this had caused the over-charging. Kate interrupted Dinesh and told him that he needed to come to the Partners meeting and report on the billing of Russell Brady and Colin Bennet to Tom as well. She explained that the issue was very important since the firm was contemplating firing John Goodfellow because they could lose Russell Brady's account who believed that he has been overcharged; while promoting Danielle Chen who had done a great job. It was 1:30pm and Dinesh was super nervous and didn't know what to do. Should he communicate his findings to anyone? And if so, what should his message be? Should he attend the meeting ignoring the instructions of his boss? He knew that Tom would not like the report and that Mr. Loveless would be furious. He also knew that John Goodfellow would lose his job and that Russell Brady would leave the firm if he didn't do something. He never thought that his Table 1 Direct Costs for September & October, 2017 Rate Russell Brady Direct Labor(DL): Professional $130/hr. 125 hrs. Collin Bennet 125 hrs. Table 1 shows the direct costs of professional labor costs for Russell Brady and Colin Bennet. The estimated professional hours (DL) for 2017 are 12,500 hrs. Table 2 shows the total estimated indirect costs (OH) costs for OM for 2017. Indirect costs had been allocated based on DL hours. Table 2 Budgeted Indirect (OH) Costs for 2017 Total Estimated Indirect Costs Research & Admin support 990,000 8000 hrs. Technology 200,000 2000 hrs. Travel 900,000 30000 miles Travel allowance 475,000 2500 days Tech support 245,000 4000 hrs. Office Space 1,500,000 5200 ft2 Entertainment and meals 500,000 5000 meals Photocopying & materials 300,000 1200 client months Total Estimated Overhead Costs $5,110,000 Table 3 shows the actual OH costs for Russell and Colin for the months of September and October. Dinesh thought about all the people directly and indirectly affected by this costing/pricing controversy. Table 4 illustrates the employees and clients directly affected, but he recognized that the firm as well as many more individuals could be indirectly affected too. Table 3 Actual Indirect (OH) Costs for September & October, 2017 Total Russell Brady Collin Bennet Indirect Costs Research & Admin support $22,000 30 hrs. 128 hrs. Technology $6,200 25 hrs. 42 hrs. Travel $67,000 500 miles 1650 miles Travel allowance $5,750 5 days 25 days Tech support $1,600 8 hrs. 17 hrs. Office Space $12,400 23 sq. feet 20 sq. Feet Entertainment and meals $4,200 10 meals 35 meals Photocopying $2,000 $150 $1,850 Actual Total Overhead Costs $121,150 Name Tom O'Brian Kate McKinney Russell Brady John Goodfellow Mr. Loveless Dinesh Kumar Collin Bennet Danielle Chen Table 4 Characters Roles Co-founder of O'Brian & McKinney (OM) Co-founder of O'Brian & McKinney (OM) Important and unhappy client Account Executive in charge of Russell Brady's account Controller (Dinesh's Boss) New hire accountant Happy client Account Executive in charge of Collin Bennet's account 1. Answer the following question and include ALL calculations: (a) Compute the billing for September/October 2017 for Russell Brady and Collin Bennet allocating OH on the basis of a single cost-driver: professional hours (estimated 12,500 hrs. 2017). (b) Compute the billing for September/October 2017 for Russell Brady and Collin Bennet allocating OH using Activity Based Costing (ABC) with the data provided by Dinesh