ABC versus Traditional Costing

Clark and Shiffer LLP perform activities related to e-commerce consulting and information systems in Vancouver, British Columbia. The firm, which bills $140 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 $50. Selected information follows.

- Billable hours to clients for the year totaled 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. Inhouse 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:

E-Commerce
Consulting
Information
Systems
Services Total

Number of clients .......................................................................... 60 240 300
Number of computer hours ............................................................ 2,100 2,900 5,000
Number of client transactions ......................................................... 720 480 1,200

Required:

1. 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. 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 activity-based costing.