Question

Clark and Shiffer LLP perform activities related to e-commerce consulting and information systems in Vancouver, British Columbia. The firm, which bills $168 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 $78. Selected information follows.

  

•	Billable hours to clients for the year totaled 8,800, consisting of: information systems services, 5,280; e-commerce consulting, 3,520.
•	Administrative cost of $423,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $225,480; in-house computing, $159,000; and miscellaneous office charges, $39,280.

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	85		265		350
Number of computer hours	2,380		3,880		6,260
Number of client transactions	860		760		1,620

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.

Answer 1

Answer:
2	Total cost based on billable hours
	Total admininstrative cost	$               423,760.00
	Billable hours	8,800
	Cost per hour	$                          48.15
	Statement of profit
		E-Commerce consulting	Information System Service	Total
	Total Hours billed	5,280.00	3,520.00	8,800.00
	Rate per hour	$                        168.00	$                        168.00
	Revenue per hour	$               887,040.00	$               591,360.00	$ 1,478,400.00
Less:	Cost per hour	$             (411,840.00)	$             (274,560.00)	$   (686,400.00)
	Administrative cost	$             (254,256.00)	$             (169,504.00)	$   (423,760.00)
	Total profit (in dollars)	$               220,944.00	$               147,296.00	$      368,240.00
	Total profit (% of revenue)	24.91%	24.91%	24.91%
		($220,944/887,040)	($147,296/591,360)	(368,240/1,478,400)
3
		Total cost	Number of activity	Cost per activity
	Number of clients	$               225,480.00	350	$              644.23
	Number of computer hours	$               159,000.00	6260	$                25.40
	Number of client transaction	$                  39,280.00	1620	$                24.25
	Total cost	$               423,760.00
	Statement of profit
		E-Commerce consulting	Information System Service	Total
	Total Hours billed	5,280.00	3,520.00	8,800.00
	Rate per hour	$                        168.00	$                        168.00
	Revenue per hour	$               887,040.00	$               591,360.00	$ 1,478,400.00
Less:	Cost per hour	$             (411,840.00)	$             (274,560.00)	$   (686,400.00)
	Staff support cost	$               (54,759.43)	$             (170,720.57)	$   (225,480.00)
	In-house computing	$               (60,450.48)	$               (98,549.52)	$   (159,000.00)
	Miscellaneous office charges	$               (20,852.35)	$               (18,427.65)	$      (39,280.00)
	Total profit (in dollars)	$               339,137.75	$                  29,102.25	$      368,240.00
	Total profit (% of revenue)	38.23%	4.92%	24.91%
		(339,137.75/887,040)	(29,102.25/591,360)	(368,240/1,478,400)