Question 3

Lim & Joyce Consulting, a Perth (Australia) based firm, provides consulting services related to project management and analytical support. It operates in a very tight local labour market and is having difficulty finding quality staff. The firm bills $350 per hour for services performed. The labour cost per hour paid by Lim & Joyce Consulting for professional staff time is $135. Additional information is provided as follows:

Billable hours to clients for the year ended totalled 10 000, consisting of: analytical support services, 3 800 hours; project management consulting services, 6 200 hours.

Administrative costs of $1 026 000 is allocated to both consulting services based on billable hours. These costs consist of staff support, $540 000; in-house computing, $409 200; and miscellaneous office charges, $76 800.

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 analytical support and project management consulting services:

Required:

Respond to the following questions:

1) Assume that the firm uses traditional costing procedures, allocating total costs on the basis of billable hours. Determine the profitability of the firms analytical support and project management consulting services, expressing your answer both in dollars and as a percentage of revenues for each consulting service. (2 marks for correct calculations; zero marks for incorrect calculations).

2) Repeat requirement 1), using activity-based costing. (5 marks; full marks if all calculations are correct; zero marks if calculations are wrong; half marks for minor errors).

3) 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 marks for identifying at least two key points and 1 mark for using the data from calculations made in points 1) and 2) above to support your argument).

Analytical Support Project Management Total Number of clients 100 400 500 3 600 5 200 8 800 Number of computer hours Number of client transactions 1 200 800 2 000