Question

In: Accounting

Part A MelSwin is an accounting consultancy firm that provides its services to small, medium and...

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.

Solutions

Expert Solution

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

                                -------------------------------------------------------------------------------------------------------------------

GRAND TOTAL               3,32,556 467,623                 584,821    1,385,000

                               --------------------------------------------------------------------------------------------------------------------

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 %


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