Question

Grady and Associates performs a variety of activities related to information systems and e-commerce consulting in Toronto, Canada. The firm, which bills $178 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 $88. Selected information follows. Billable hours to clients for the year totaled 9,800, consisting of information systems services, 5,880; e-commerce consulting, 3,920. Administrative cost of $438,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $232,080; in-house computing, $164,000; and miscellaneous office charges, $42,680. 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 4,230 2,480 6,710 Number of client transactions 860 910 1,770 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. 3. Assume that the firm uses activity-based costing. 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. 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?

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 $ $ %

Assume that the firm uses activity-based costing. 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. (Round intermediate calculations and final answers to 2 decimal places.)

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

Answer 1

Answer ;-

Part 2)

We need to calculate the predetermined overhead rate on the basis of billable hours as follows:

Predetermined Overhead Rate = Total Overheads/Total Billable Hours = $438,760/9,800= $44.771

_____

The total profitability is calculated as below:

	Information System Services	E-Commerce Consulting
Total Billings	$1,046,640(5,880*178)	$697,760(3,920*178)
Less
Staff Costs	$517,440(5,880*88)	$344,960(3,920*88)
Administrative Costs	$263,253(5,880*44.771)	$175,502(3,920*44.771)
Total Income (in Dollars)	$254,187	$169,458
Profitability (in Percentage)	24.29%	24.29%

______

The table as required in the question is completed as below:

Department	Total Billings	Income	Profitability
Information System Services	$1,046,640	$254,187	24.29%
E-Commerce Consulting	$697,760	$169,458	24.29%

______

PART 3)

The activity rates for different activities are calculated as below:

Activity	Total Cost (A)	Activity Base (B)	Activity Rate (A/B)
Staff Support	$232,080	330	clients	703.27	per client
In-house Computing	$164,000	6,710	computer hours	24.44	per computer hour
Miscellaneous Office Charges	$42,680	1,770	client transactions	24.11	per client transaction

_____

The total profitability under activity based costing is calculated as below:

	Information System Services	E-Commerce Consulting
Total Billings	1,046,640.00(5,880*178)	697,760 (3,920*178)
Less
Staff Costs	$517,440(5,880*88)	$344,960(3,920*88)
Staff Support Costs	179,333.85(255*703.27)	52,745.25(75*703.27)
In-house Computing	103,381.20(4,230*24.44)	60,611.20(2,480*24.26)
Miscellaneous Office Charges	20,734.60(860*24.11)	21,940.10(910*24.09)
Total Income (in Dollars)	$225,750.35	$217,503.45
Profitability (in Percentage)	21.60%	31.17%

______

The table as required in the question is completed as below:

Department	Total Billings	Income	Profitability
Information System Services	1,046,640	225,750	21.60%
E-Commerce Consulting	697,760	217,503	31.17%

______

Part 4)

Yes, Grady's attitude should change. Based on the calculations performed in Part 3), it can easily be concluded that e-commerce consulting is generating a higher return (31.17%) as compared to information services (21.60%). Even if it is important to keep both the services to stay in business, the professionals should spend more time in handling e-commerce activities.