Problem:
A business performs a variety of activities related to information systems and e-commerce consulting. The business bills $125 per hour for services performed. They are in a very tight local labor market and are having trouble finding quality help for their overworked staff of professionals. The cost per hour for professional staff time is $45. See information below.
Billable hours to clients for the year totaled $5,000. Information systems was $3,100 and e-commerce consulting was $1,900.
Administrative cost of $342,000 was (and continues to be) allocated to both services based on billable hours. These costs consist of $180,000 staff support, $136,400 in-house computing, and $25,600 in miscellaneous office charges.
A recent analysis of staff support costs found a correlation with the number of clients served. In-house computing and miscellaneous office charges varied directly with the number of computer hours logged and number of client transactions, respectively. A tabulation revealed the following data:
Information Systems E-commerce Total
No. of Clients 200 50 250
No. of computer hrs 2600 1800 4400
No. of client transactions 400 600 1000
1. Activity-based costing is said to result in improved costing accuracy when compared with traditional costing procedures. Explain how this improved accuracy can be attained.
2. Assume that the firm uses traditional costing procedures, allocating total costs on the basis of billable hours. Determine the profitability of the firm's information systems and e-commerce activities. Express the answer in both dollars and as a percentage of activity revenue.
3. Repeat question number 2 using activity based costing
4. One of the firm's partners doesn't care where his professionals spend their time because he claims, "many clients have come to expect both services and we need both to stay in business. Also, information systems and e-commerce professionals are paid the same hourly rate." Shouldn't his attitude change and why?
5. Is an aggressive expansion of either service currently desirable? Why?