Milton and Rhodes perform consulting services for e-commerce consulting and information systems in Western Australia. The firm, which bills $125 per hour for services performed, is in a very tight local labour market and having trouble recruiting quality staff. The labour cost which Milton and Rhodes pays for its professional staff is $45 per hour. Selected information about the business is as follows:-
Billable hours to clients for the year totalled 5,000, made up of information systems services 3,100 hours and e-commerce consulting of 1,900 hours.
Administrative costs of $342,000 per year were allocated to both types of consulting services based on billable hours. Administrative costs consist of staff support $180,000, in-house computing $136,400 and miscellaneous office costs $25,600. A recent analysis of staff support costs found that there was a correlation with the number of clients served. In-house computing costs was correlated with the number of computer hours logged, and miscellaneous office costs varied with the number of client transactions.
The following table shows the number of clients, computer hours and client transactions for the e-commerce and information systems consulting services:-
Information
e-commerce systems
consulting consulting Total
|
Number of clients
|
50
|
200
|
250
|
|
Number of computer hours
|
1,800
|
2.600
|
4.400
|
|
Number of client transactions
|
600
|
400
|
1.000
|
Required:
1. Many businesses are moving to Activity-Based Costing for improved costing accuracy as compared to conventional costing procedures. Explain why activity-based costing is considered to provide more accurate results
2. Milton and Rhodes is currently using conventional costing, and allocating total costs based on billable hours. Determine the profitability of the firm's e-commerce and information systems consulting services, expressing your answer in both dollars and % of revenue.
3. Milton and Rhodes decides to move to activity-based costing to try to better understand their results and address some of the problems they are having with staffing. Identify the key activities and activity drivers, and explain why you have chosen each driver.
4. Using your answers from 3, and activity-based costing, determine the profitability of the firm's e-commerce and information systems consulting services, expressing your answers in both dollars and % of revenue
5. One of the firm's partners does not care whether professional staff are working on e-commerce or information systems consulting. He says that many clients have come to expect the firm to provide both services, and that e-commerce and information systems consulting professionals are paid the same rate. Do you think the partner is correct, or there would a different approach increase the firm's profitability and address its staffing issues? Make recommendations to improve and grow the business and explain your answers.