A business conducts the variety of activities associated to information systems and e-commerce consulting. Business bills $125 per hour for services performed. They are in very tight local labor market and are having trouble finding quality aid for their overworked staff of professionals. Cost per hour for professional staff time is $45.
Billable hours to clients for year totaled $5,000. Information systems was $3,100 and e-commerce consulting was $1,900.
Administrative cost of $342,000 was (and continues to be) assigned to both services based on billable hours. These costs comprises $180,000 staff support, $136,400 in-house computing, and $25,600 in miscellaneous office charges.
Current analysis of staff support costs found the correlation with number of clients served. In-house computing and miscellaneous office charges differed directly with number of computer hours logged and number of client transactions, respectively. Tabulation revealed the following data:
Information Systems E-commerce Total
No. of Clients 200 50 250
No. of computer hrs 2600 1800 4400
No. of client transactions 400 600 1000
1. Activity-based costing is said to result in enhanced costing accuracy when compared with traditional costing procedures. Describe how this enhanced accuracy can be attained.
2. Suppose that firm utilizes traditional costing procedures, allocating total costs on basis of billable hours. Find out the profitability of firm's information systems and e-commerce activities.
3. Repeat problem number 2 by using activity based costing
4. One of the firm's partners does not care where his professionals spend their time as he claims, "many clients have come to expect both services and we require both to stay in business. Also, information systems and e-commerce professionals are paid same hourly rate." Should not his attitude change and describe why?
5. Is the aggressive expansion of either service currently desirable? describe why?