Clark &Schiffer LLP perform activities related to e-commerce consulting and information systems in Vancouver, British Columbia. The firm, which bills $140 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 $50. Selected information follow:
- Billable hours to clients for the year totaled 6,000, consisting of: information systems services, 3,600; e-commerce consulting, 2,400.
- Administrative cost of $381,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $207,000; in-house computing, $145,000; and miscellaneous office charges, $29,760.
- 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
|
60
|
240
|
300
|
|
Number of computer hours
|
2,100
|
2,900
|
5,000
|
|
Number of client transactions
|
720
|
480
|
1,200
|
Required:
a. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly (use no more than half a page) explain how this improved accuracy is attained.
b. 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.
c. Repeat requirement (b), using activity-based costing.
d. 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? Explain.
e. Is an aggressive expansion of either service currently desirable? Briefly discuss.