Wizard Architects has three types of service lines: 

• Basic: Customer accepts the quoted “off the shelf” service with no modifications.
• Upgrade: Customer is allowed three changes.
• Specialized: Customer meets with both salespeople and architects multiple times to understand specific needs.

Although the direct materials and direct labor are directly traceable, the indirect costs of servicing and selling are assigned based on the direct labor hours of the architects. Wizard estimates total indirect costs of $440,000 and total direct labor hours for architects of 22,000. Using ABC software, resources are assigned to three major activity cost pools: Customer acquisition, Customer servicing, and Customer retention. Below are the ABC assignments to the three service lines.

a. What are the indirect customer-related cost allocations to the three service lines under the traditional approach using architect direct labor hours?

b. What are the indirect customer-related cost allocations to the three service lines under the ABC customer-related activity cost pool assignment?

c. Which specific tasks or individual activities might be included in each of the three activity cost pools?

d. Management was surprised to learn that indirect customer costs of the specialized service line were so much greater under the ABC analysis than under the simple allocation base of architect direct labor hours. Explain possible reasons for such a difference.

e. Discuss whether analyzing the preceding customer-related activities would be relevant for other service companies, such as department stores or insurance companies.

Activities and Direct Labor Hours Customer acquisition Customer service Customer retention Architect direct labor hours Basic Upgrade Specialized Total $15,000 $18,000 $62,000 $75,000 $23,000 $40,000 13,000 5,000 $42,000 $75,000 $90,000 $227,000 $75,000 $138,000 4,000 22,000