Grady and Associates performs a variety of activities related to information sys
ID: 2580526 • Letter: G
Question
Grady and Associates performs a variety of activities related to information systems and e-commerce consulting in Toronto, Canada. The firm, which bills $125 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 $45. Selected information follows.
- Billable hours to clients for the year totaled 5,000, consisting of information systems services, 3,100; e-commerce consulting, 1,900.
- Administrative cost of $342,000 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $180,000; in-house computing, $136,400; and miscellaneous office charges, $25,600.
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:
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 e-commerce and information systems 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?
Information Systems Services E-Commerce Consulting Total Number of clients 200 50 250 Number of computer hours 2,600 1,800 4,400 Number of client transactions 400 600 1,000Explanation / Answer
Answer 2. Predetermined Overhead Rate = $342,000 / 5,000 Hrs 68.40 Predetermined Overhead Rate = $68.40 per Billable hr. Statement Showing Profitability Under Traditional Costing System Information Systems Services E-Commerce Consulting Billable Hours 3100 1900 Billing Rate per Hour $125 $125 Revenues 387,500 237,500 Less: Staff Hours Costs 139,500 85,500 Less: Administrative Costs 212,040 129,960 Total Costs 351,540 215,460 Net Profit 35,960 22,040 Net Profit Margin 9.28% 9.28% Answer 3. Activity Overhead Cost Driver Quantity Activity Rate Staff support 180,000 250 Clients Served 720.00 per client served In-House Computing 136,400 4,400 Computer Hrs 31.00 per computer hr Misc. Office Charges 25,600 1,000 Transactions 25.60 per transaction Total Overhead 342,000 Assigning Overhead Cost to Product Using ABC Method Activity Based Overhead Rate Information Systems Services E-Commerce Consulting Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Staff support 720.00 per client served 200 Clients Served 144,000 50 Clients Served 36,000 In-House Computing 31.00 per computer hr 2,600 Computer Hrs 80,600 1,800 Computer Hrs 55,800 Misc. Office Charges 25.60 per transaction 400 Transactions 10,240 600 Transactions 15,360 Total Overhead Cost 234,840 107,160 Statement Showing Profitability Under ABC Costing System Information Systems Services E-Commerce Consulting Billable Hours 3100 1900 Billing Rate per Hour $125 $125 Revenues 387,500 237,500 Less: Staff Hours Costs 139,500 85,500 Less: Administrative Costs: Staff support 144,000 36,000 In-House Computing 80,600 55,800 Misc. Office Charges 10,240 15,360 Total Costs 374,340 192,660 Net Profit 13,160 44,840 Net Profit Margin 3.40% 18.88% Answer 4. No, Grady's attitude should not be changed. Because, in both services the billable hour rate is same $125 per hour. So, whrever professionals spends their time, the revenue will be the same.
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