Question

Problem 5-50 Activity-Based Costing; Analysis of Operations (LO 5-1, 5-2, 5-4, 5-5, 5-7, 5-10)

Grady and Associates performs a variety of activities related to information systems and e-commerce consulting in Toronto, Canada. The firm, which bills $160 per hour for services performed, is in a very tight local labor market and is having difficulty finding quality help for its overworked professional staff. The cost per hour for professional staff time is $70. Selected information follows.

• Billable hours to clients for the year totaled 8,000, consisting of information systems services, 4,800; e-commerce consulting, 3,200.
• Administrative cost of $411,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $220,200; in-house computing, $155,000; and miscellaneous office charges, $36,560.

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 Services				E-Commerce Consulting				Total
Number of clients		245				65				310
Number of computer hours		3,600				2,300				5,900
Number of client transactions		680				820				1,500

Required:
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, expressing your answer both in dollars and as a percentage of activity revenue.
3. Assume that the firm uses activity-based costing. Determine the profitability of the firm’s information systems and e-commerce activities, expressing your answer both in dollars and as a percentage of activity revenue.
4. Jeffrey Grady, one of the firm’s partners, doesn’t care where his professionals spend their time because, as he notes, “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.” Should Grady’s attitude change?

I need # 3.

Answer 1

Solution

Grady and Associates

Q3.

Determination of the profitability of the firm’s information systems and e-commerce activities assuming activity based costing:

Information Systems Services

Billable hours – 4,800; 60%
Activity Revenue at $160 per hour	$768,000
Costs:
Professional Staff expenses at $70 per hour	$336,000
Gross Margin	$432,000
Allocated Administrative expenses	$285,179
Net Income	$146,821

Net income for information systems services as a percentage of activity revenue –

Activity revenue = $768,000

Net income for information systems services = $146,821

Percent = 146,821/768,000 = 19.11%

Percentage of activity revenue = 19.11%

Working –

	Activity Costs	Activity Driver	Proportion to total	Cost Allocated
Staff Support	$220,200	Number of Clients	245	79.03%	$174,029
In-house Computing	$155,000	Number of Computer Hours	3,600	61.02%	$94,576
Miscellaneous Office Charges	$36,560	Number of Client Transactions	680	45.33%	$16,574
Total Administrative cost allocated		$285,179

Computations of proportions –

Proportion of number of clients = 245/310 = 79.03%

Proportion of computer hours = 3600/5900 = 61.02%

Proportion of client transactions = 680/1500 = 45.33%

E-Commerce Consulting –

Billable hours – 3,200; 40%
Activity Revenue at $160 per hour	$512,000
Costs:
Professional Staff expenses at $70 per hour	$224,000
Gross Margin	$288,000
Allocated Administrative expenses	$126,581
Net Income	$161,419

Net income for e-commerce consulting as a percentage of activity revenue –

Activity revenue = $512,000

Net income for e-commerce consulting = $161,419

Percent = 161,419/512,000 = 31.53%

Percentage of activity revenue = 31.53%

Working – allocation of administrative cost

	Activity Costs	Activity Driver	Proportion to total	Cost Allocated
Staff Support	$220,200	Number of Clients	65	20.96%	$46,171
In-house Computing	$155,000	Number of Computer Hours	2300	38.98%	$60,424
Miscellaneous Office Charges	$36,560	Number of Client Transactions	820	54.67%	$19,986
Total Administrative cost allocated		$126,581

Computations of proportions –

Proportion of number of clients = 65/310 = 20.96%

Proportion of computer hours = 2300/5900 = 38.98%

Proportion of client transactions = 820/1500 = 54.67%