1. Complete the cost allocation worksheet in case Exhibit 4

2. Based on the cost allocations, determine the costs per unit of output for the three service lines: software development, professional services, and special projects.

3. Based on Q1 and Q2, provide recommendations on how cost information can be useful in Heath Services Softwares decision-making process.

OPERATIONS Budget The HSS budget consisted primarily of salaries and standard operating expenses for a small software company. The total operating budget was CA$1.05 million' annually (see Exhibit 1). Lines of Service From the client's perspective, HSS provided three distinct services: Software development was the backbone of HSS, and the capacity within software development drove all other costs. Activities included software development, the provision of help desk services, and, occasionally, sales to existing clients looking for new features. There were four software developers in this area. The total office space for the software development team was 250 square metres. Professional services consisted of two client service representatives who worked with new sites and travelled to sites to install the software and provide technical support during the installation process. Professional services occupied 40 square metres of office space. Special projects was important because, since its inception, HSS would in any given year receive requests for special or unique features within the software. Special projects would be developed for one client and then, when appropriate, bundled with future versions of the software. Special projects were difficult to forecast but were a key means of developing new and important software features. There was no specific office space allocated for special projects. COST ALLOCATION The challenge facing HSS was how to allocate costs to the three lines of service so that each could be competitively priced. The company did not have a standard costing system. Direct materials and licences were charged to the service area that incurred the costs. The actual direct materials costs in 2016 had been allocated as $23,000 for software development, $35,000 for professional services, and $4,500 for special projects. Direct labour hours for the software developers and client service representatives were tracked using time tracking software and assigned directly to the business lines (see Exhibit 2). Under HSS's old costing setup, indirect labour costs were not allocated to the business lines. But to be profitable and to properly price the company's software licences, the company needed to allocate indirect costs to the appropriate business lines. HSS considered three possible cost drivers for its indirect costs: the number of staff performing each task, the indirect labour hours, and the space occupied by each service area. The use of each of these potential cost drivers is outlined in Exhibit 2. * All dollar amounts are in Canadian dollars unless otherwise specified. Page 3 9B19B001 Service overhead included salary for the supervisor of the software development, all outsourced development costs, and depreciation for the equipment (see Exhibit 1). The supervisor of the development staff worked a standard eight-hour day and received 15 days (120 hours) of vacation and 12 days (96 hours) of statutory holidays. The maximum number of hours that the supervisor worked was 1,864 in a given year (see Exhibit 3). Administration overhead included salaries for the three senior executives in the company, generic software licences, marketing and travel, office expenses, and utilities (see Exhibit 1). The senior executives had fixed salaries, and each worked the same number of hours (1,864) per year (see Exhibit 3). The office footprint for the executives totalled 40 square metres. The company also had some key performance data from 2015: the projected number of licences for the year, the number of new clients and special projects, and the number of labour hours available for the supervisor of software development and for the corporate administrative (executive) personnel (see Exhibit 3). The number of available labour hours was net of vacation days and statutory holidays. Exhibit 1: Health Services Software, Operating Budget in CAS Notes Cost Item Salaries Senior executives (3) Software development supervisor (1) 1 Software developers (4) Client service representatives (2) Outsourcing contracts Depreciation on equipment Software licences Materials and licences Marketing and travel Office expenses Utilities Total Cost 320,000 Salaries for HSS executives 85,000 Salary for supervisor of all software development 280,000 Salaries for software development 130.000 Salaries for installation services and client support 12,000 Software development outsourced to other companies 6,500 Annual straight-line depreciation for equipment 20,000 General licences for software used by the entire company 62,500 Material and software licences specific to individual clients 73,000 Promotion of HSS and travel to locations for new installations and support 37,000 General operating expenses at HSS 24,000 All ulides: electricity, heat, water 1,050,000 Exhibit 2: Health Services Software, Cost Allocation Data Software Development Professional Special Projects Office Services 70% 10% 10% 90% 20% 0% Direct Labour (tracked with time sheets) Software developers (4) Client service representatives (2) Indirect Labour Hours Service overhead: software development supervisor (1) Administration: senior executives (3) Number of Staff Software developers (4) Client service representatives (2) Physical Layout Square metres 1584 3914 93 1618 187 60 4 2 250 40 40 Exhibit 3: Health Services Software, Key Performance Data Number of software licences Number of new clients Number of special projects Service overhead: software development supervisor (hours) Administration: senior executives (hours) Company footprint (square metres) Exhibit 4: Cost Allocation Worksheet 4 1,200 3 5 1,864 5,592 330 Software Professional in CAS Total Development Special Projects Services Direct Costs Cost 1 Materials and licenses $ 62,500.00 $ 23,000.00 $ 35,000.00 $ 4,500.00 Cost 2 Software Developers $ 280,000.00 $ 196,000.00 $ 28,000.00 $ 56,000.00 Cost 3 Client service representatives $ 130,000.00 $ 13,000.00 $ 117,000.00 $ Total direct costs $ 472,500.00 $ 232,000.00 $ 180,000.00 $ 60,500.00 Service Overhead Cost 1: salary for the supervisor of SD $ 85,000.00 $ 72.231.76 $ 4.240.88 $ 8,527.36 Cost 2: outsourced development cost $ 12,000.00 Cost 3: Depreciation for the equipment $ 6,500.00 Total service overhead $ 103,500.00 Administration Cost 1 Salaries for the 3 senior executive: $ 320,000.00 $ 223,977.11 $ 92,589.41 $ 3,433.48 Cost 2 generic software licenses $ 20,000.00 Cost 3 Utilities $ 24,000.00 Cost 4 Marketing and travel $ 73,000.00 Cost 5 Office expenses $ 37,000.00 Total administration 474,000 Total Cost $ 1,050,000.00 Software Overhead Application Rate Professional Per Hour Development Services Special Projects Total service overhead rate Total administration rate Total overhead application rate Total OPERATIONS Budget The HSS budget consisted primarily of salaries and standard operating expenses for a small software company. The total operating budget was CA$1.05 million' annually (see Exhibit 1). Lines of Service From the client's perspective, HSS provided three distinct services: Software development was the backbone of HSS, and the capacity within software development drove all other costs. Activities included software development, the provision of help desk services, and, occasionally, sales to existing clients looking for new features. There were four software developers in this area. The total office space for the software development team was 250 square metres. Professional services consisted of two client service representatives who worked with new sites and travelled to sites to install the software and provide technical support during the installation process. Professional services occupied 40 square metres of office space. Special projects was important because, since its inception, HSS would in any given year receive requests for special or unique features within the software. Special projects would be developed for one client and then, when appropriate, bundled with future versions of the software. Special projects were difficult to forecast but were a key means of developing new and important software features. There was no specific office space allocated for special projects. COST ALLOCATION The challenge facing HSS was how to allocate costs to the three lines of service so that each could be competitively priced. The company did not have a standard costing system. Direct materials and licences were charged to the service area that incurred the costs. The actual direct materials costs in 2016 had been allocated as $23,000 for software development, $35,000 for professional services, and $4,500 for special projects. Direct labour hours for the software developers and client service representatives were tracked using time tracking software and assigned directly to the business lines (see Exhibit 2). Under HSS's old costing setup, indirect labour costs were not allocated to the business lines. But to be profitable and to properly price the company's software licences, the company needed to allocate indirect costs to the appropriate business lines. HSS considered three possible cost drivers for its indirect costs: the number of staff performing each task, the indirect labour hours, and the space occupied by each service area. The use of each of these potential cost drivers is outlined in Exhibit 2. * All dollar amounts are in Canadian dollars unless otherwise specified. Page 3 9B19B001 Service overhead included salary for the supervisor of the software development, all outsourced development costs, and depreciation for the equipment (see Exhibit 1). The supervisor of the development staff worked a standard eight-hour day and received 15 days (120 hours) of vacation and 12 days (96 hours) of statutory holidays. The maximum number of hours that the supervisor worked was 1,864 in a given year (see Exhibit 3). Administration overhead included salaries for the three senior executives in the company, generic software licences, marketing and travel, office expenses, and utilities (see Exhibit 1). The senior executives had fixed salaries, and each worked the same number of hours (1,864) per year (see Exhibit 3). The office footprint for the executives totalled 40 square metres. The company also had some key performance data from 2015: the projected number of licences for the year, the number of new clients and special projects, and the number of labour hours available for the supervisor of software development and for the corporate administrative (executive) personnel (see Exhibit 3). The number of available labour hours was net of vacation days and statutory holidays. Exhibit 1: Health Services Software, Operating Budget in CAS Notes Cost Item Salaries Senior executives (3) Software development supervisor (1) 1 Software developers (4) Client service representatives (2) Outsourcing contracts Depreciation on equipment Software licences Materials and licences Marketing and travel Office expenses Utilities Total Cost 320,000 Salaries for HSS executives 85,000 Salary for supervisor of all software development 280,000 Salaries for software development 130.000 Salaries for installation services and client support 12,000 Software development outsourced to other companies 6,500 Annual straight-line depreciation for equipment 20,000 General licences for software used by the entire company 62,500 Material and software licences specific to individual clients 73,000 Promotion of HSS and travel to locations for new installations and support 37,000 General operating expenses at HSS 24,000 All ulides: electricity, heat, water 1,050,000 Exhibit 2: Health Services Software, Cost Allocation Data Software Development Professional Special Projects Office Services 70% 10% 10% 90% 20% 0% Direct Labour (tracked with time sheets) Software developers (4) Client service representatives (2) Indirect Labour Hours Service overhead: software development supervisor (1) Administration: senior executives (3) Number of Staff Software developers (4) Client service representatives (2) Physical Layout Square metres 1584 3914 93 1618 187 60 4 2 250 40 40 Exhibit 3: Health Services Software, Key Performance Data Number of software licences Number of new clients Number of special projects Service overhead: software development supervisor (hours) Administration: senior executives (hours) Company footprint (square metres) Exhibit 4: Cost Allocation Worksheet 4 1,200 3 5 1,864 5,592 330 Software Professional in CAS Total Development Special Projects Services Direct Costs Cost 1 Materials and licenses $ 62,500.00 $ 23,000.00 $ 35,000.00 $ 4,500.00 Cost 2 Software Developers $ 280,000.00 $ 196,000.00 $ 28,000.00 $ 56,000.00 Cost 3 Client service representatives $ 130,000.00 $ 13,000.00 $ 117,000.00 $ Total direct costs $ 472,500.00 $ 232,000.00 $ 180,000.00 $ 60,500.00 Service Overhead Cost 1: salary for the supervisor of SD $ 85,000.00 $ 72.231.76 $ 4.240.88 $ 8,527.36 Cost 2: outsourced development cost $ 12,000.00 Cost 3: Depreciation for the equipment $ 6,500.00 Total service overhead $ 103,500.00 Administration Cost 1 Salaries for the 3 senior executive: $ 320,000.00 $ 223,977.11 $ 92,589.41 $ 3,433.48 Cost 2 generic software licenses $ 20,000.00 Cost 3 Utilities $ 24,000.00 Cost 4 Marketing and travel $ 73,000.00 Cost 5 Office expenses $ 37,000.00 Total administration 474,000 Total Cost $ 1,050,000.00 Software Overhead Application Rate Professional Per Hour Development Services Special Projects Total service overhead rate Total administration rate Total overhead application rate Total