Grady and Associates performs a variety of activities related to information systems and e-commerce consulting in Toronto, Canada. The firm, which bills $162 per hour for services performed, is in a very tight local labor market and is having difficulty finding quality help for its overworked professional staff. The cost per hour for professional staff time is $72. Selected information follows. Billable hours to clients for the year totaled 8,400, consisting of information systems services, 5,040; e-commerce consulting, 3,360.
Administrative cost of $417,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $222,840; in-house computing, $157,000; and miscellaneous office charges, $37,920.
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:
Information Systems E-Commerce Consulting Total
Services
Number of clients 255 75 330
Number of computer hours 3,740 2,340 6,080
Number of client transactions 720 840 1,560
1. Assume that the firm uses traditional costing procedures, allocating total costs on the basis of billable hours. Determine the profitability of the firm’s information systems and e-commerce activities, expressing your answer both in dollars and as a percentage of activity revenue
2. Assume that the firm uses activity-based costing. 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. Jeffrey Grady, 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 Grady’s attitude change?