Q16 (Source: Hilton Managerial Accounting 8e, 2009, Problem 5-45) John Ho LLP perform activities related to e-commerce consulting and information systems in Vanconver, British Columbia. The firm, which bills $140 per hour for services performed, is in a very tight local labour market and is having difficulty finding quality help for its overworked professional staff. The cost per hour for professional staff time is $50. Selected information follows. Billable hours to clients for the year totalled 6,000, consisting of: information systems services, 3,600; e-commerce consulting, 2,400. Administrative cost of $381,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $207,000; in-house computing, $145,000; and miscellaneous office charges, $29,760. 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. A tabulation revealed the following data: No. of clients E-commerce consulting Info systems Total services 60 240 300 2,900 5,000 720 480 1,200 2,100 No. of computer hours No. of client transactions Required: 1. 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 activities, expressing your answer both in dollars and as a percentage of activity revenue. 3. Repeat requirement (2), using ABC. 4 Robert Lee, one of the firm's partners, does not 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 Robert's attitude change? Explain. 5. Is an aggressive expansion of either service currently desirable? Briefly discuss. 51 (Activity-based-costing) Source: Management and cost accounting 5e, Colin Drury (problem 10.6), Thomson Learning, 2000. Having attended a CIMA course on activity-based-costing (ABC) you decide to experiment by applying the principles of ABC to the four products currently made and sold by your company. Details of the four products and relevant information are given below for one period: Product Outputs in units Cost per unit: Direct material Direct labour Machine hours (per unit) A B C D 120 100 80 120 $ $ $ $ 40 50 30 60 28 21 14 21 4 3 2 3 The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units. The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analysed as follows: Machine department cost (rent, business rates, depreciation And supervision) Set-up costs $ 10,430 5,250 3,600 2,100 4,620 Stores receiving Inspection/Quality control Materials handling and despatch You have ascertained that the "cost drivers" to be used are as listed below for the overhead costs shown: Cost Set-up costs Stores receiving Inspection/Quality control Materials handling and despatch Cost driver Number of production runs Requisitions raised Number of production runs Orders executed The number of requisitions raised on the stores was 20 for each product and the number of orders executed was 42, each order being for a batch of 10 of a product. You are required: (a) To calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis; (b) To calculate the total costs for each product, using activity-based-costng; (c) To calculate and list the unit product costs from your figures in (a) and (b) above, to show the difference and to comment briefly on any conclusions which may be drawn which could have pricing and profit implications. (CIMA Stage 2 Costing Accounting)