Kauffman and Associates Kauffman & Associates is a small management consulting f
ID: 2712021 • Letter: K
Question
Kauffman and Associates
Kauffman & Associates is a small management consulting firm supplying information systems services to clients in the mid-west. Kauffman has two kinds of professional staff: (i) systems analysts, and (ii) programmers and web page designers. The systems analysts, constituting the senior professional staff, are highly trained and highly paid with considerable consulting experience. They are responsible for selling Kaufmann’s services, understanding clients’ information needs, designing the overall networked information system and directing the work of more junior professional staff. The junior professional staff, consisting of programmers and web page designers, is responsible for the detailed work of writing computer programs and setting up web pages.
Kauffman’s weekly cost structure is as follows:
Compensation paid to professional staff:
10 systems analysts $ 40,000
30 programmers and web page designers 36,000
Occupancy costs:
(Office rent, utilities, office equipment) 8,000
Travel costs 20,000
Secretarial and office staff 9,000
Computer hardware (amortized cost) 2,000
Stationery 2,000
Total weekly expenses $117,000
Most of these costs are governed by long term contracts, so there little variability in costs from week to week. Each professional staff member is employed 40 hours per week.
Each professional staff member submits a weekly time report that shows the number of hours worked during the week on each of his/her client engagements. The time worked on specific client engagements is called “billable time.” Time that is not spent on specific client engagements is called “unassigned time.” It is quite common for professional staff members to have some unassigned time on their time reports. Kauffman has been billing its clients at a uniform rate of $150 per hour of billable time.
While Kauffman’s weekly costs are more or less fixed, its billable time fluctuates erratically from week to week, ranging from 1,000 hours to 1,500 hours. Kauffman has a simple costing scheme. Billable time is traced to individual clients and costed at that professional staff member’s hourly salary ($100 per hour for systems analysts and $30 per hour for junior professional staff). All other costs are treated as overhead. A single overhead rate is calculated each week by dividing the observed overhead cost for the week by the total billable time recorded for the week to obtain an overhead cost per billable hour. This is the rate at which overhead is assigned to each client engagement. For example, if this overhead rate turns out to be $40 per billable hour in some week, and if client A is serviced 100 billable hours in that week, then the accounting system assigns an overhead cost of $4,000 to that client engagement.
An interview with the managing partner of Kauffman revealed that the mix of senior staff and junior staff billable time varies considerably across client engagements. Most of the “unassigned time” of the professional staff is actually spent on professional development activities, which is particularly important for the systems analysts. On average, systems analysts report 35% of their time as “unassigned” while junior professional staff report only 5% of their time as “unassigned.” Systems analysts have much larger offices and occupy about 40% of Kauffman’s office space. Assume that the remaining 60% is occupied by the junior professional staff. About 80% of the time of Kauffman’s secretarial and office staff is spent on servicing the systems analysts and only 20% on servicing the junior professional staff. On the other hand, about 90% of the computer hardware is used by junior professional staff and only 10% by systems analysts. Stationery seems to be consumed equally by each professional staff member.
Required:
Redesign Kauffman’s cost accounting system to obtain more useful information on the cost of servicing each client. For this purpose you need only specify:
(i) Which costs should be treated as “prime” costs, i.e. which costs would be directly traced to individual client engagements, keeping in mind the feasibility of doing so.
(ii) Which costs should be treated as support (overhead) costs. Group these support costs into overhead cost pools, specify a driver for each pool, and, using the data supplied in the case, calculate the cost driver rates that would be used to assign these costs to specific client engagements.
Please present brief arguments to justify your choices. You may find it useful to try calculating the cost of two of the jobs, Jobs A and B under the present method as well as under your suggested alternative. Job A consumes 50 hours of systems analyst time and 200 hours of programmer time while Job B consumes 100 hours of systems analyst time and 100 hours of programmer time.
Explanation / Answer
Weekly Cost structure Number Amount cost per employee working hours cost per hour System Analysts compensation 10 40000 4000 40 100 Programmers & Web designers compensation 30 36000 1200 40 30 occupancy costs (rent, utilities, equipment) 8000 Travel costs 20000 Secretarial and Offiee Staff 9000 computer hardware (amortized cost) 2000 stationery 2000 Total 117000 weekly working hours per employee 40 Proportion of unassigned time systems staff 35% Programmers & Web Designers 5% Billable time per week per system analyst =40*(1-35%) 26 Billable time per week per junior staff =40*(1-5%) 38 Weekly Billable time =weekly billable hours * total number of staff billable hours no of staff total = hours *staff systems analysts 26 10 260 Junior Staff 38 30 1140 Total Billable time (in hours) 1400 Grouping of costs as per existing calculation method of the firm Billable Hours hourly rate Total Cost Prime Costs (Billable Hours) systems analysts 260 100 26000 Junior Staff 1140 30 34200 Total Prime Costs 60200 Overheads cost Billable hours Hourly rate for allocation of overhead Compensation - senior staff 14000 1400 10.00 40000-26000 Compensation - Junior Staff 1800 1400 1.29 36000-34200 Occupancy Costs 8000 1400 5.71 Travel costs 20000 1400 14.29 Secretarial and offices staff 9000 1400 6.43 Computer Hardware (amortized cost) 2000 1400 1.43 Stationery 2000 1400 1.43 The cost structure currently being used by the company is not actually reflecting the allocation of overheads. The reason is that the hourly rate is arrived at by dividing the overhead cost by total number of billable hours irrespective of the usage of the asset by a particular employee group. Suggested cost structure for the above weekly costs is as follows The estimates provided the firm the weekly billable hours remains the same based on assigned and unassigned time Prime costs (attributable to client) Billable Hours Hourly cost Total Amount systems analysts 260 100 26000 Junior Staff 1140 30 34200 Total Prime Costs 1400 60200 Overheads Cost Billable hours hourly cost Senior Staff 14000 260 53.85 14000 Junior Staff 1800 1140 1.58 36000-34200 Occupancy costs Senior staff (occupy 40% of office space) 3200 260 12.31 8000*40% Junior staff (occupy 60% of office space) 4800 1140 4.21 8000*60% Secretarial and office staff servicing senior staff (80% of time) 7200 260 27.69 9000*80% Servicing Junior staff (20% of time) 1800 1140 1.58 9000*20% Computer Hardware Senior Staff (10% of cost) 200 260 0.77 2000*10% Junior Staff (90% of cost) 1800 1140 1.58 2000*90% Travel Expenses 20000 1400 14.29 Stationery Senior Staff (50% of cost) 1000 260 3.85 2000*50% Junior Staff (5% of cost) 1000 1140 0.88 2000*50% Comparison of client Billing under existing structure and suggested strucutre - Job A Exising suggested Billable hours hourly rate total no of hours hourly rate total Prime Time Senior Staff (65%of 50 hours) 32.5 100 3250 32.5 100 3250 Junior Staff (95% of 200 hours) 190 30 5700 190 30 5700 Total Prime Cost 222.5 8950 222.5 8950 Overhead Costs Compensation Paid 187.86 958.10 Senior Staff (35% of 50 hours) 17.5 10.00 175.00 17.5 53.85 942.31 Junion Staff (5% of 200 hours) 10 1.29 12.86 10 1.58 15.79 Occupancy Costs 222.5 5.71 1271.43 1200.00 Senior Staff 32.5 12.31 400.00 Junior staff 190 4.21 800.00 Travel Costs 222.5 14.29 3178.57 222.5 14.29 3178.57 Secretarial and Office Staff 222.5 6.43 1430.36 1200.00 Senior Staff 32.5 27.69 900.00 Junior Staff 190 1.58 300.00 Computer Hardware 222.5 1.43 317.86 325.00 Senior Staff 32.5 0.77 25.00 Junior Staff 190 1.58 300.00 Stationery 222.5 1.43 317.86 291.67 Senior Staff 32.5 3.85 125.00 Junior Staff 190 0.88 166.67 Total Cost 6703.93 7153.34 Comparison of client Billing under existing structure and suggested strucutre - Job B Exising suggested Billable hours hourly rate total no of hours hourly rate total Prime Time Senior Staff (65%of 100 hours) 65 100 6500 65 100 6500 Junior Staff (95% of 100 hours) 95 30 2850 95 30 2850 Total Prime Cost 160 9350 160 9350 Overhead Costs Compensation Paid 356.43 1892.51 Senior Staff (35% of 100 hours) 35 10.00 350.00 35 53.85 1884.62 Junion Staff (5% of 100 hours) 5 1.29 6.43 5 1.58 7.89 Occupancy Costs 160 5.71 914.29 1200.00 Senior Staff 65 12.31 800.00 Junior staff 95 4.21 400.00 Travel Costs 160 14.29 2285.71 160 14.29 2285.71 Secretarial and Office Staff 160 6.43 1028.57 1950.00 Senior Staff (80% of 222.5 hours) 65 27.69 1800.00 Junior Staff (20% of 222.5 hours) 95 1.58 150.00 Computer Hardware 160 1.43 228.57 200.00 Senior Staff (10% of 222.5 hours) 65 0.77 50.00 Junior Staff (90% of 222.5 hours) 95 1.58 150.00 Stationery 160 1.43 228.57 333.33 Senior Staff (50% of 222.5 hours) 65 3.85 250.00 Junior Staff (50% of 222.5 hours) 95 0.88 83.33 Total Cost 5042.14 7861.56
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