Question

Clark and Shiffer LLP perform activities related to e-commerce consulting and information systems in Vancouver, British Columbia. The firm, which bills $146 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 $56. Selected information follows.

  

•  
Billable hours to clients for the year totaled 6,600, consisting of: information systems services,
3,960; e-commerce consulting, 2,640.

•  
Administrative cost of $390,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $210,960; in-house computing, $148,000; and miscellaneous office charges, $31,800.

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   75      255      330   
Number of computer hours   2,160      3,110      5,270   
Number of client transactions   750      540      1,290   

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 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.)

      
  

3.  
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.)

      
  

4.  
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?

      
   
   Yes
   No

Answer 1

2. Traditional costing:

Department	Total Billings	Net Income	Profitability
E-commerce consulting	385440	81296	21.09	%
Information systems	578160	121944	21.09	%

Working:

	E-commerce consulting	Information systems
Total billings	385440	578160
	(2640 x $146)	(3960 x $146)
Cost for professional staff time	147840	221760
	(2640 x $56)	(3960 x $56)
Administrative cost	156304	234456
	($390760 x 2640/6600)	($390760 x 3960/6600)
Total costs	304144	456216
Net Income	81296	121944

3. Activity-Based Costing:

Department	Total Billings	Net Income	Profitability
E-commerce consulting	385440	110506	28.67	%
Information systems	578160	92734	16.04	%

Working:

Activity Cost Pool	Cost $	Cost Driver	Activity Rate $	E-commerce consulting		Information systems
				Cost Driver	Allocated Cost $	Cost Driver	Allocated Cost $
Staff support	210960	330	639.27	75	47945.45	255	163014.55
In-house computing	148000	5270	28.08	2160	60660.34	3110	87339.66
Miscellaneous office charges	31800	1290	24.65	750	18488.37	540	13311.63
Total cost $	390760				127094.17		263665.83

	E-commerce consulting	Information systems
Total billings	385440	578160
	(2640 x $146)	(3960 x $146)
Cost for professional staff time	147840	221760
	(2640 x $56)	(3960 x $56)
Administrative cost	127094	263666
Total costs	274934	485426
Net Income	110506	92734

4. Yes

Since the profitability of both services is different.