Clark and Shiffer LLP conduct activities associated to e-commerce consulting and information systems in Vancouver, British Columbia. Firm, that bills $140 per hour for services performed, is in very tight local labor market and is having difficulty finding quality help for its overworked professional staff. Cost per hour for professional staff time is $50. Information given below.
- Billable hours to clients for year totaled 6,000, consisting of: information systems services, 3,600; e-commerce consulting, 2,400.
- Administrative cost of $381,760 was (and continues to be) assigned to both services based on billable hours. These costs comprise staff support, $207,000; in-house computing, $145,000; and miscellaneous office charges, $29,760.
Recent analysis of staff support costs found the correlation with number of clients served. Inhouse computing and miscellaneous office charges differed directly with number of computer hours logged and number of client transactions, respectively.
Tabulation revealed the following data:
E-Commerce
Consulting
Information
Systems
Services Total
Number of clients .......................................................................... 60 240 300
Number of computer hours ............................................................ 2,100 2,900 5,000
Number of client transactions ......................................................... 720 480 1,200
Questions:
1. Activity-based costing (ABC) is said to result in enhanced costing accuracy when compared with traditional costing procedures. Describe how this enhanced accuracy is attained.
2. Suppose that firm uses traditional costing procedures, assigning total costs on basis of billable hours. Find out the profitability of firm's e-commerce and information systems activities, expressing your answer both in dollars and as a percentage of activity revenue.
3. Repeat requirement (2), utilizing activity-based costing