Question

Grady and Associates performs a variety of activities related to information systems and e-commerce consulting in Toronto, Canada. The firm, which bills $174 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 $84. Selected information follows.

Billable hours to clients for the year totaled 9,400, consisting of information systems services, 5,640; e-commerce consulting, 3,760.

Administrative cost of $432,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $229,440; in-house computing, $162,000; and miscellaneous office charges, $41,320.

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		280				100				380
Number of computer hours		4,090				2,440				6,530
Number of client transactions		820				890				1,710

Required:

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.

Answer 1

1.                  Activity-based application rates:

Activity	Cost		Activity Driver		Application Rate
Staff support	$229,440	÷	380 clients	=	$603.7895 per client
In-house computing	162,000	÷	6,530 computer hours (CH)	=	$24.8086 per CH
Miscellaneous office charges	41,320	÷	1,710 client transactions (CT)	=	$24.1637 per CT

Staff support, in-house computing, and miscellaneous office charges of information systems services and e-commerce consulting:

Activity	Information Systems Services	E-Commerce Consulting
Staff support:
280 clients x $603.7895...	$169,061
100 clients x $603.7895...		$ 60,379
In-house computing:
4,090 CH x $24.8086……….	101,467
2,440 CH x $24.8086……….		60,533
Miscellaneous office charges:
820 CT x $24.1637…………...	19,814
890 CT x $24.1637…………...		21,506
Total ……………………………….	$290,342	$142,418

           

Profitability of information systems services and e-commerce consulting:

	Information Systems Services	E-Commerce Consulting
Billings:
5,640 hours x $174………..	$981,360

3,760 hours x $174………..		$654,240
Less: Professional staff cost:
5,640 hours x $84……	(473,760)
3,760 hours x $84……		(315,840)
Administrative cost…….	(290,342)	(142,418)
Income…………………………..	$ 217,258	$ 195,982
Income ÷ billings……………...	22.14%	29.96%