Question

Clark and Shiffer LLP perform activities related to e-commerce consulting and information systems in Vancouver, British Columbia. The firm, which bills $162 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 $72. Selected information follows. • Billable hours to clients for the year totaled 8,200, consisting of: information systems services, 4,920; e-commerce consulting, 3,280. • Administrative cost of $414,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $221,520; in-house computing, $156,000; and miscellaneous office charges, $37,240. 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	70		250		320
Number of computer hours	2,320		3,670		5,990
Number of client transactions	830		700		1,530

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.)

      

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.)

      

Answer 1

Traditional costing:

Department	Total Billings	Net Income	Profitability
E-commerce consulting	531360	129296	24.33	%
Information systems	797040	193944	24.33	%

Working:

	E-commerce consulting	Information systems
Total billings	531360	797040
	(3280 x $162)	(4920 x $162)
Cost for professional staff time	236160	354240
	(3280 x $72)	(4920 x $72)
Administrative cost	165904	248856
	($414760 x 3280/8200)	($414760 x 4920/8200)
Total costs	402064	603096
Net Income	129296	193944

Activity-Based Costing:

Department	Total Billings	Net Income	Profitability
E-commerce consulting	531360	166120	31.26	%
Information systems	797040	157120	19.71	%

Working:

Activity Cost Pool	Cost $	Cost Driver	Activity Rate $	E-commerce consulting		Information systems
				Cost Driver	Allocated Cost $	Cost Driver	Allocated Cost $
Staff support	221520	320	692.25	70	48457.50	250	173062.50
In-house computing	156000	5990	26.04	2320	60420.70	3670	95579.30
Miscellaneous office charges	37240	1530	24.34	830	20202.09	700	17037.91
Total cost $	414760				129080.29		285679.71

	E-commerce consulting	Information systems
Total billings	531360	797040
	(3280 x $162)	(4920 x $162)
Cost for professional staff time	236160	354240
	(3280 x $72)	(4920 x $72)
Administrative cost	129080	285680
Total costs	365240	639920
Net Income	166120	157120