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.

Assume that the direct cost of visiting Hawthorn Cabinet is $2100. Estimate the cost of providing services for this client using both the activity-based costing and the traditional method used by MelSwin?

Solutions

Expert Solution

As we know that the

Data Analysis at Hourly rate is

==> Total Over Head Cost/Number Of Data Analysis Hourly.

Given Total Over Head Cost==>13,85,000

Number Of Data Analysis Hourly==>20,000

Tnen We Get That

==> 13,85,000/20,000==>$69.25

Data Analysis at Hourly rate is ==>$69.25

Direct cost of visiting Hawthorn Cabinet ==>$2100

Now Lets calculate Indirect Cost Of Producing Services

Then we get

==>122hrs*69.25==>$8,448.5

So, The total cost of service

==>$2100+$8,448.5

==>$10,548.5

By using ABC method-

Given that the activity cost of Visiting small-sized clients is==>$45,000

Quantity of activity driver for No. of small-sized clients is==>20

Then, we get that

==>45000/20==>$2250

Similarly, for medium-sized clients will be

==>120000/50==>$2400

Similarly, for large sized clients will be

==>150,000/60==>$2500

Similarly, the cost activity of Data collection is 200,000 and Quantity of activity driver for no. of hrs is 10,000 will be

==>200,000/10,000==>20

Similarly, the cost activity of Data analysis is 800,000 and Quantity of activity driver for no. of hrs is 20,000 will be

==>800000/20000==>40

Similarly, the cost activity of Report Writing is 50,000 and Quantity of activity driver for no. of words is 1,000,000 will be

==>50,000/1,000,000==>0.05

Similarly, the cost activity of Printing is 10,000 and Quantity of activity driver for no. of papers is 50,000 will be

==>10,000/50,000==>0.2

the cost activity of Correcting errors is 10,000 and Quantity of activity driver for no. of erors is 50 will be

==>10000/50==>200

The Direct Cost will be==>$2100

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

So, The total cost is

==> $2100+$1300+$4880+$347.6+$46.2+$0

==>$8691.8


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