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Accounting:Activity based costing and Traditional costing.

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A business performs a variety of activities related to information systems and e-commerce consulting. The business bills $125 per hour for services performed. They are in a very tight local labor market and are having trouble finding quality help for their overworked staff of professionals. The cost per hour for professional staff time is $45. See information below.

Billable hours to clients for the year totaled $5,000. Information systems was $3,100 and e-commerce consulting was $1,900.

Administrative cost of $342,000 was (and continues to be) allocated to both services based on billable hours. These costs consist of $180,000 staff support, $136,400 in-house computing, and $25,600 in miscellaneous office charges.

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 Total

No. of Clients 200 50 250
No. of computer hrs 2600 1800 4400
No. of client transactions 400 600 1000

1. Activity-based costing is said to result in improved costing accuracy when compared with traditional costing procedures. Explain how this improved accuracy can be 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 information systems and e-commerce activities. Express the answer in both dollars and as a percentage of activity revenue.

3. Repeat question number 2 using activity based costing

4. One of the firm's partners doesn't care where his professionals spend their time because he claims, "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." Shouldn't his attitude change and why?

5. Is an aggressive expansion of either service currently desirable? Why?

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Solution Summary

The problem deals with determining the total product cost under traditional and activity based costing techniques.

See Also This Related BrainMass Solution

Calculate full cost and selling price of refrigerators: Original cost, ABC cost method

See attached file.

For this assignment you will need to read the information provided in Exercise 5.8 of the textbook. This exercise relates to a company that manufactures three types of refrigerators. As the management accountant for this business, you have been asked by your boss to compute two separate costs for each line of refrigerator and then complete a detailed analysis.

After you have read the information provided in the textbook, complete the following:
Calculate for each product the full cost and selling price determined by:

The original costing method
The activity-based costing method

Once you have the figures computed, prepare a detailed report for your boss that includes a discussion of the following information:

An analysis of implications involved with each of the two costing systems and subsequent price differences.

An analysis of each costing system, including a recommendation of which cost system you would recommend or any changes you would suggest to the pricing strategy.

An analysis of the business/strategic options that exist for your organization in light of the new information, including possible pricing strategies.

The assignment should be prepared as a concise business report to your supervisor that includes both the figures computed and the analysis of the situation

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