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.
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?
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