Question

Clark and Shiffer LLP perform activities related to e-commerce consulting and information systems in Vancouver, British Columbia. The firm, which bills $174 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 $84. Selected information follows.

  

•	Billable hours to clients for the year totaled 9,400, consisting of: information systems services, 5,640; e-commerce consulting, 3,760.
•	Administrative cost of $432,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $229,440; in-house computing, $162,000; and miscellaneous office charges, $41,320.

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:

	E-Commerce Consulting		Information Systems Services		Total
Number of clients	100		280		380
Number of computer hours	2,440		4,090		6,530
Number of client transactions	890		820		1,710

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 e-commerce and information systems activities, expressing your answer both in dollars and as a percentage of activity revenue. (Do not round intermediate calculations. Round "Profitability" to 2 decimal places.)

      

3.	Using activity-based costing, determine the profitability of the firm’s e-commerce and information systems activities, expressing your answer both in dollars and as a percentage of activity revenue. (Round intermediate calculations and final answers to 2 decimal places.)

      

4.	Stephen Shiffer, 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 Shiffer’s attitude change?
	Yes No

rev: 02_17_2014_QC_45

Answer 1

Clark and Shiffer LLP

1. Allocation of total costs on the basis of billable hours using traditional costing system:

Total administrative costs = $432,760

Total Billable hours = 9,400

Cost per hour = 432,760/9,400

Billable hours for Information Systems Service = 5,640

Allocation of administrative cost to Information Systems Service = 432,760 x (5,640/9,400) = $259,656

Billable hours for E-Commerce = 3,760

Allocation of administrative cost to E-Commerce = 432,760 x (3,760/9,400) = $173,104

• Determination of profitability

Determination of profitability
Billable hours - 9,400
Activity Revenue at $174		$1,635,600
Costs:
Professional Staff expenses at $84 per hour		$789,600
Gross Margin		$846,000
Less: Administrative expenses		$432,760
Net Income		$413,240

profitability of E-Commerce-
Billable hours	3,760
proportion to total billable hours	3760/9400	40%
Profitability share	413,240 x 40%	$165,296
Profitability of Information System Services
Billable hours	5,640
proportion to total billable hours	5,640/9,400	60%
Profitability Share	$413240 x 60%	$247,944

1. Determination of profitability of e-commerce and information support systems using activity based costing:

E-Commerce –

Billable hours - 3,760; 40%
Activity Revenue at $174 per hour	$654,240
Costs:
Professional Staff expenses at $84 per hour	$315,840
Gross Margin	$338,400
Allocated Administrative expenses	$142,436
Net Income	$195,964

Working –

	Activity Costs	Activity Driver		Proportion to total	Cost Allocated
Staff Support	$229,440	Number of Clients	100	26.32%	$60,389
In-house Computing	$162,000	Number of Computer Hours	2,440	37.37%	$60,540
Miscellaneous Office Charges	$41,320	Number of Client Transactions	890	52.05%	$21,507
Total Administrative cost allocated					$142,436

Information Systems Services –

Billable hours - 5,640; 60%
Activity Revenue at $174 per hour	$981,360
Costs:
Professional Staff expenses at $84 per hour	$473,760
Gross Margin	$507,600
Allocated Administrative expenses	$290,324
Net Income	$217,276

Working – allocation of administrative cost

	Activity Costs	Activity Driver		Proportion to total	Cost Allocated
Staff Support	$229,440	Number of Clients	280	73.68%	$169,051
In-house Computing	$162,000	Number of Computer Hours	4,090	62.63%	$101,460
Miscellaneous Office Charges	$41,320	Number of Client Transactions	820	47.95%	$19,813
Total Administrative cost allocated					$290,324

1. Yes, Stephen Shiffer’s attitude should change.

The allocation of administrative cost based on activity based costing is more accurate as the cost of each component of the administrative expenses is allocated based on its actual usage by each service – E-Commerce and Information Systems Services.

On comparing the costs and profitability under both the systems, e-commerce is allocated a relatively high amount of administrative cost under the traditional system, and hence its profitability under traditional system is lower.

Though the professional staff is paid at the same hourly rate, it’s a direct cost and requires no allocation.

Alternatively, administrative cost needs to be assigned on a more accurate basis – activity or usage basis so as to reveal the accurate profitability.

	Profitability - Traditional Costing System	Profitability - Activity based Costing
E-Commerce	$165,296	$195,964
Information Systems Services	$247,944	$217,276
Total net income	$413,240	$413,240