Question

Grady and Associates performs a variety of activities related to information systems and e-commerce consulting in Toronto, Canada. The firm, which bills $164 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 $74. Selected information follows.

Billable hours to clients for the year totaled 8,400, consisting of information systems services, 5,040; e-commerce consulting, 3,360.

Administrative cost of $417,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $222,840; in-house computing, $157,000; and miscellaneous office charges, $37,920.

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		255				75				330
Number of computer hours		3,740				2,340				6,080
Number of client transactions		720				840				1,560

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.(Do not round intermediate calculations. Round "Profitability" to 2 decimal places.

	Department Total Billings Income Profitability Information systems services % E-commerce consulting %

3. Assume that the firm uses 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.)

	Department Total Billings Income Profitability Information systems services % E-commerce consulting %

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? Yes or No?

Answer 1

2. Under traditional costing

Administration cost + professional cost

Information system= {$417760*5040/8400=$250656} + $74*5040= $623616

E-commerce={ $417760*3360/8400= $167104} +$ 74*3360= $415744

Deptt	Total billings	Total cost	Total income	profitability
Information system	$164*5040=$826560	$623616	$202944	24.55%
E - commerce	$164*3360=$551040	$415744	$135296	24.55%

3. Under ABC it will be as folloWS:

Administration costs	cost	information system	E commerce
Support staff	$222840	$222840*255/330= $172195	$222840*75/330= $50645
In house	$157000	$157000*3740/6080= $96576	$157000*2340/6080= $60424
Miscellaneous	$37920	$37920*720/1560= $17502	$37920*840/1560= $20418
Professional cost		5040*$74=$ 372960	3360*$74=$ 248640
Total cost		$659233	$380127
Total billing		$164*5040=$ 826560	$164*3360=$ 551040
Net income		$167327	$170913
Profitability		20.24%	31.02%

4. Yes, Grady's attitude should change as E-commerce consulting department is more profitable as compared to information system services . So professionals time shouldn't be spent on information systems services by sacrificing e-commerce consulting. E-commerce consulting should be the priority.

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