Required:

Part l . Compute the overhead costs to be assigned to each branch based on the ABC concepts. To get full credit, you must compute and display a cost per unit of the activity driver (cost per direct labor dollar for general administration, cost per timesheet entry for project costing, etc.). To get full credit, you must also show fairly complete, fully labeled computations (without the reader having to review your Excel formula sheets or any other attachments). I believe that the ABC example in the PowerPoint slides along with my explanation (using letters in the column headings) was documented in a way that made it easy for you to understand the computations that were done. Extend the same courtesy to the reader when you prepare your solution; not just as a courtesy, but to display good written communication skills.

Part 2. Compute the profitability of each branch office using ABC. First, compute the contribution margin by subtracting the direct costs (and only the direct costs) from sales. Then, subtract the allocated cost from the contribution margin to get net income. Show your income statement in table format; you can see the table format used in the income statement in the problem.

Part 3. To the extent possible with the new ABC information, discuss ideas for improving the business. For business improvement, your ideas need to be specific; saying something general such as the company needs to decrease cost or needs to decrease it overhead cost or needs to study its costs is useless to the reader. To get credit, you must write in complete, grammatically correct sentences. Written communication skills are always important! While your discussion of each individual idea should be brief, the number of ideas and the specifics of your ideas should not be. Anything over one single-spaced page for requirement 3 will be ignored.

Activity-Based Costing Miami Valley Architects Inc. provides a wide range of engineering and architectural consulting services through its three branch offices in Columbus, Cincinnati, and Dayton, Ohio. The company allocates resources and bonuses to the three branches based on the net income of the period. The results of the firm's performance for the year 2010 follows ($ in thousands):

Columbus Dayton

$1 ,500 $11067 $3,986

Less: Direct labor 382 317 317

Direct materials 281 421 185 887

710 589 589

92

Miami Valley accumulates overhead items in one overhead pool and allocates it to the branches based on direct labor dollars. For 2010, this predetermined overhead rate was $ 1.859 for every direct labor dollar incurred by an office. The overhead pool includes rent, depreciation, and taxes, regardless of which office incurred the expense. Some branch managers complain that the overhead allocation method forces them to absorb a portion of the overhead incurred by the other offices.

Management is concerned with the 2010 operating results. During a review of overhead expenses, management noticed that many overhead items were clearly 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 wherever possible should provide a more accurate picture 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 ($ in thousands):

Activity pools and their corresponding cost drivers were determined from the accounting records and staff surveys as follows:

General administration	$ 409,000
Project costing	48,000
Accounts payable/receiving	139,000
Accounts receivable	47 ,000
Payroll/Mail sort and delivery	30,000
Personnel recruiting	38,000
Empfoyee insurance processing	14,000
Proposals	139,000
Sales meetings/Sales aids	202,000
Shipping	24,000
Ordering	48,000
Duplicating costs	46,000
Blueprinting	77 ,ooo

$1261,000

Cost Driver Direct labor cost Timesheet entries Vendor invoices Client invoices 588 Employees New hires 8 claims filed Proposals Contracted sales Projects shipped Purchase orders Copies duplicated Blueprints

Columbus $ 382,413 6,000 1 ,020 23 200 1,824,439 1,399,617 99 135 162,500 39,000

Cincinnati 317,086 3,800 850 444 26 250 124 110 146,250 31,200

Dayton 317,188 3,500 400 96 18 60 571,208 30 80 65,000 16,000