2. With increase in product diversity and complexity, individuals’ products rate of consumption will differ, ABC costing will successfully allow all the relevant non-manufacturing cost to be included according to their usage, therefore increasing accuracy
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 consulting services, expressing your answer both in dollars and as a percentage of activity revenue.
SERVICE CATEGORY NO OF BILLABLE HOURS REVENUE LABOUR COST ADMIN COST PROFIT % OF REVENUE INFORMATION SYSTEM SERVICES 3100 581250 209250 318060 53940 9.28% E-COMMERCE 1900 356250 128250 194940 33060 9.28% TOTAL 5000 937500 337500 513000 87000 Selling/billing price for service 187.5/hour Labour cost 67.5/ hours Total admin cost 513000 Admin cost per billable hours 513000/5000 = 102.6
3. Repeat requirement 2, using activity-based costing.
Activity Total cost Activity driver Cost/unit of applied activity Staff support 270000 250 clients 1080 / client In house computing 204600 4400 computer hours 46.5 /computer hr Misc office charges 38400 1000 client transactions 38.4 / CT Activity Cost/unit of applied activity Level of activity for e- commerce Total cost of activity Staff support 1080/client 50 clients 54000 In house computing 46.5 computer hours 1080 computer hours 83700 Misc office charges 38.4 client transaction 600 client transactions 23040 Total $160,740
Activity Cost/unit of applied activity Level of activity for Information systems consulting Total cost of activity % of total cost Staff support 1080/client 200 clients 216000 61.31 In house computing 46.5 / computer hours 2600 computer hours 120900 34.32 Misc office charges 38.4/client transaction 400 client transactions 15360 4.36 Total $352,260 Activity Total cost Activity driver Cost/unit of applied activity Staff support 270000 250 clients 1080 / client In house computing 204600 4400 computer hours 46.5 /computer hr Misc office charges 28400 1000 client transactions 38.4 / CT
Service category Number of hours Revenue Labour cost Admin cost Profit % of revenue Information system services 3100 581250 209250 352260 19740 3.39612 E-commerce 1900 356250 128250 160740 67260 18.88 Total 5000 937500 337500 513000 87000
4. Sam Whincup, 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 Whincup's attitude change? Explain. ANSWER: Yes. Judging from the results from ABC costing, it shows that e-commerce generates a higher rate of return as compared to information system services . Therefore since the workers are paid the same hourly rate for both services (showing that labour cost will be same), they should spend more time in e- commerce sector so that the overall profits will increase.
5. Is an aggressive expansion of either consulting service desirable? Briefly discuss.
- Winter '14
- Cost driver