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 Kaufmanns 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.

Kauffmans 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 Kauffmans 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 members 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 Kauffmans office space. Assume that the remaining 60% is occupied by the junior professional staff. About 80% of the time of Kauffmans 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 Kauffmans 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.