Implementing Cost Strategies to Improve Profitability Milestone 1 Requirements Step 1: Milestone 1 You begin by reviewing your understanding of activity based costing. In addition to the text, a useful resource is http://www.accountingcoach.com/activity-based- costing/explanation, https://www.youtube.com/watch?v=P2wU1d_vhW4. Note the following video addresses activity=based costing in a service organization: https://www.youtube.com/watch?v=pL4dKcRLdLc Step 2: Milestone 1 Review the budgeted income statement (Exhibit 1) for the current year. Use and EXCEL file. The budgeted income statement appears as the first sheet in the EXCEL file under the label "Exhibit 1 budgeted income statement". The four partners work 2,000 hours a year and estimate that they are able to charge 80% of their time to clients. Thus, some of the professional labor costs are assigned to overhead. Currently, the firm's accounting system only treats professional hours as direct. All other costs, such as the paralegal costs are treated as overhead. Determine the overhead rate per productive professional direct labor hour. Be sure you distinguish between the cost associated with each client as compared to the amount billed to each clients for services rendered. Calculate the overhead application rate using the traditional method, using the sheet "traditional overhead rate" sheet" Step 3: Milestone 1 – Traditional analysis (in EXCEL) Milestone 1 Use the sheet labeled "Exhibit 4 - Traditional vs. ABC" to show the total costs charged to each of the five clients for the month of January using the traditional cost allocation method. billed Use the overhead application rate you calculated in step Then determine the amount of revenue billed to each client. Remember, clients are billed for both paralegal hours and professional hours. Finally, determine the profitability by client for the month of January using the traditional cost allocation method.