Brown and Whincup perform consulting services related to e-commerce and information systems in Adelaide. The firm, which bills $187.50 per hour for services performed, is in a very tight local labour market and is having difficulty finding quality staff. The labour cost per hour paid by Brown and Whincup for professional staff time is $67.50. Selected information follows:
(a) Billable hours to clients for the year totalled 5000, consisting of: information systems services, 3100; e-commerce, 1900.
(b) Administrative cost of $513 000 was (and continues to be) allocated to both consulting services based on billable hours. These costs consist of staff support, $270 000; in-house computing. $204 600; and miscellaneous office charges, $38 400.
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. The following table shows the number of clients. computer hours and client transactions for the e-commerce and information systems consulting services.
____________________________ E-commerce _____ Information Systems _______ Total
_____________________________ Consulting __________ Consulting_________________
Number of clients ......................... 50 ......................... 200 ......................... 250
Number of computer hours ............ 1800 ........................ 2600 ...................... 4400
Number of client transactions ........... 600 ........................ 400 ...................... 1000
Required:
1. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained.
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.
3. Repeat requirement 2, using activity-based costing.
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.
5. Is an aggressive expansion of either consulting service desirable? Briefly discuss.