In: Accounting
Part A
MelSwin is an accounting consultancy firm that provides its services to small, medium and large sized clients. The client size is determined by the number of employees as follows:
Small sized clients |
Medium sized clients |
Large sized clients |
|
Number of employees |
<50 |
50 to 100 |
>100 |
MelSwin uses a traditional overhead cost driver of “data analysis hours” to estimate the cost of providing its services. Although MelSwin does not operate in a competitive environment, the Finance Manager, Grainne, advocates to use advance costing methods like the activity-based costing. Otto, the CEO, argues that the current method provides an acceptable cost estimation and given the high cost of implementing ABC, it will not beneficial. However, he agreed to hire a university graduate to examine the costs and benefits of implementing ABC. To do so, Mary, a recent Swinburne graduate, has been hired to establish an activity-based costing system. The activities and associated costs are estimated as follows:
Activity |
Activity cost |
Activity driver |
Quantity of activity driver |
Visiting small sized clients |
45,000 |
Number of small sized clients |
20 |
Visiting medium sized clients |
120,000 |
Number of medium sized clients |
50 |
Visiting large sized clients |
150,000 |
Number of large sized clients |
60 |
Data collection |
200,000 |
Number of hours |
10,000 |
Data analysis |
800,000 |
Number of hours |
20,000 |
Report Writing |
50,000 |
Number of words |
1,000,000 |
Printing |
10,000 |
Number of papers |
50,000 |
Correcting errors |
10,000 |
Number of errors |
50 |
Total cost |
1,385,000 |
Mary has collected the following information about the average activity usage of three groups of clients:
Activity |
small sized client |
medium sized client |
large sized client |
Data collection |
55 |
70 |
90 |
Data analysis |
120 |
142 |
175 |
Report Writing |
5500 |
7000 |
9000 |
Printing |
200 |
320 |
500 |
Correcting errors |
0.2 |
0.32 |
0.5 |
Mary has also collected the following information about a client, Hawthorn Cabinet, with 60 employees.
Activity |
Quantity |
Data collection |
65 |
Data analysis |
122 |
Report Writing |
6,952 |
Printing |
321 |
Correcting errors |
0 |
Mary has been asked to prepare a report about the implementation of ABC and answer some relevant questions.
Part B
Mary has also become responsible to prepare cash budgets for the next six months. 15 % of the clients are small sized, 40% medium sized and the rest are large sized.
The patterns of billing receipts for each group of clients are presented as follows:
Small sized clients |
Medium sized clients |
Large sized clients |
|
During month of service |
30% |
30% |
20% |
During month following service |
70% |
40% |
40% |
During second month following service |
30% |
40% |
Estimated billings for the last six months of this year are listed below.
Month |
Estimated billings |
July |
140000 |
August |
130000 |
September |
145000 |
October |
150000 |
November |
180000 |
December |
120000 |
Estimated cash outflows for the last three months of this year are listed below.
Month |
Estimated cash outflows |
October |
100000 |
November |
140000 |
December |
85000 |
MelSwin expects to have a cash balance of $50,000 on 1 October and
has a policy of maintaining a minimum cash balance of $40,000 at
the end of each month.
Mary has been asked to prepare a cash budget report for the next six months including answering some relevant questions.
MelSwin considers an investment to improve its productivity in the future including upgrading software and hardware equipment. Determine the amount of short-term borrowing, if any, necessary on 1 November for that potential investment which requires $350,000 cash on 1 November.
ANSWER;
A . ACTIVITY BASED COSTING ;( ABC) . It is a costing method that identifies activities in an organisation and assigns the costs of each activity to all products and services according to the actual consumption bt each. This model assigns more indirect costs into direct costs compared to conventional costing.
Description Small Medium Large Toal Cost ($)
1 Number of Clients 20 50 60 NA
2. Visit Cost ( $) 45,000 120,000 150,000 315,000
3.Data Collection 51,163 65,116 83,721 200,000
4. Data analysis 219,680 259,954 320,366 800,000
5.Report writing 12,791 16,279 20,930 50,000
6. Printing 1,961 3,137 4,902 10,000
7.Correcting Errors 1,961 3,137 4,902 10,000
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GRAND TOTAL 3,32,556 467,623 584,821 1,385,000
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B. Average Activity Usage used for arriving apportionment of xpenses
1. Data Collection 55 70 90 215
2. Data Analysis 120 142 175 437
3.Report Writing 5500 7000 9000 21,500
4.Printing 200 320 500 1020
5. Correcting 0.2 0.32 0.50 1.02
PART B OF THE QUESTION :
Workings for the Capital Budgeting . because of the time constraint not able to complete.
Description July Augst September October November December Total
1.Billing ($) 140,000 130,000 145,000 150,000 180,000 120,000 865,000
2. On Client basis
Small 21,000 19,500 21,750 22,500 27,000 18,000 129,750
Medium 56,000 52,000 58,000 60,000 72,000 48,000 346,000
Large 63,000 58,500 65,250 67,500 81,000 54,000 389,250
TOTAL 140,000 130,000 145,000 150,000 180,000 120,000 865,000
In the above we have to apply the recovery from each type of client in the respective months for arriving at the cash collection.: For arriving the monthly bill collection from clients '
Small 30% 70 % NA
Medium 30 % 40% 30%
Large 20 % 40 % 40 %