Question

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.

Prepare a cash budget for the last quarter of the year that includes monthly budgeted cash receipts and payments.

Answer 1

Part-A

Cost/activity
1	2	3	4=2/3
Activity	Cost	Total activity units	Cost/activity unit
Data collection	200,000	10,000	20
Data analysis	800,000	20,000	40
Report Writing	50,000	1,000,000	0.05
Printing	10,000	50,000	0.2
Correcting errors	10,000	50	200

ABC method of cost-allocation to clients
	small sized client			medium sized client			large sized client			Total
Visiting clients			45,000			120000			150000	315,000
Av.cost of actvities:
	Activity	Cost/activity	Totalcost	Activity	Cost/activity	Totalcost	Activity	Cost/activity	Totalcost
Data collection	55	20	1100	70	20	1400	90	20	1800	4,300
Data analysis	120	40	4800	142	40	5680	175	40	7000	17,480
Report Writing	5500	0.05	275	7000	0.05	350	9000	0.05	450	1,075
Printing	200	0.2	40	320	0.2	64	500	0.2	100	204
Correcting errors	0.2	200	40	0.32	200	64	0.5	200	100	204
Total av. Cost of activities			6255			7558			9450	23,263
No.of clients			20			50			60	130
Total cost of activities			125100			377900			567000	1,070,000
Total cost(visiting+activities)			170,100			497,900			717,000	1,385,000

ABC report for the client
Activity	Quantity	Cost/activity unit	Total
Data collection	65	20	1300
Data analysis	122	40	4880
Report Writing	6,952	0.05	347.6
Printing	321	0.2	64.2
Correcting errors	0	200	0
Add:
Average visiting fees	150000/60=		2500
Total cost for the client			9091.8

Part-B

Table-1
1	2	3=2*15%	4=2*40%	5=2*45%
Month	Estimated billings	Small-sized	Medium	Large-sized
August	130000	19500	52000	58500
September	145000	21750	58000	65250
October	150000	22500	60000	67500
November	180000	27000	72000	81000
December	120000	18000	48000	54000
Billing receipts:
From small-size clients	Oct.	Nov.	Dec.	Total
30% collections (Col.3 Table-1)	6750	8100	5400	20250
70% collections (Col.3 Tb-1)	15225	15750	1890	32865
1.Total collections	21975	23850	7290	53115
From medium-size clients
30% collections(Col.4 Tb.1)	18000	21600	14400	54000
40% collections (col4. tbl.1)	23200	24000	28800	76000
2nd 30% collections(col4Tbl.1)	15600	17400	18000	51000
2.Total collections	56800	63000	61200	181000
From large-size clients
20% collections(col.5 tbl.1)	13500	16200	10800	40500
40% collections (col .5 tbl1)	26100	27000	32400	85500
2nd 40% collections(col.5 tbl.1)	23400	26100	27000	76500
3.Total collections	63000	69300	70200	202500
4.Total Billing receipts(1+2+3)	141775	156150	138690	436615
Cash Budget for the last quarter Oct-Dec
Beginning balance	50000	91775	107925	50000
Billing receipts(frm above)	141775	156150	138690	436615
Total cash available	191775	247925	246615	486615
Estd. Cash outflows	100000	140000	85000	325000
Surplus/Deficit	91775	107925	161615	161615