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 most recent year 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

Miami Valley accumulates overhead items in one overhead pool and allocates it to the branches based on direct labor dollars. For this year, the 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 recent 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
	$ 1,261,000

Cost Driver	Amount of Cost Driver Use by Location
	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:

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?

Answer rating: 100% (QA)

ActivityBased Costing ABC is a method used to allocate overhead costs based on activities Instead of ... View the full answer