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	Cincinnati	Dayton	Total
Sales		$1,500	$1,419	$1,067	$3,986
Less: Direct labor		$382	$317	$317	$1,016
Direct Materials		$281	$421	$185	$887
Overhead		$710	$589	$589	$1,888
Net Income		$127	$92	-$24	$195
Pred Ovh Rate =	$1.859

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):

 

	Columbus	Cincinnati	Dayton	Total
Direct Overhead	$180	$270	$177	$627

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

Employee insurance processing ..... 14,000

Proposals .............. 139,000

Sales meetings/Sales aids ....... 202,000

Shipping ................ 24,000

Ordering ............... 48,000

Duplicating costs ........... 46,000

Blueprinting .............. 77,000

 

			Volume of Cost Drivers by Location
Cost Driver			Columbus	Cincinnati	Dayton
Direct labor cost			$382,413	$317,086	$317,188
Timesheet entries			6,000	3,800	3,500
Vendor Invoices			1,020	850	400
Client invoices			588	444	96
Employees			23	26	18
New hires			8	4	7
Insurance claims filed			230	260	180
Proposals			200	250	60
Contracted sales			1,824,439	1,399,617	571,208
Projects shipped			99	124	30
Purchase orders			135	110	80
Copies duplicated			162,500	146,250	65,000
Blueprints			39,000	31,200	16,000

Required

(Round all answers to thousands)

1. What overhead costs should be assigned to each branch based on ABC concepts?

2. What is the contribution of each branch before subtracting the results obtained in requirement 1?

3. What is the profitability of each branch office using ABC?

4. Evaluate the concerns of management regarding the volume-based cost technique currentlyused.