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.

Do you recommend using the activity-based costing at MelSwin? Briefly explain your reason.

Answer 1

Activity-based costing is often practiced in the production industry because it improves the security of cost data, originating almost real costs including more beneficial analyzing the costs acquired by the firm while its manufacturing process.

I can say Yes, I recommend practicing the ABC at MelSwin. Because of the total cost of service following ABC-Activity-Based Costing method which is more moderate than the method Traditional Costing.

The traditional method of costing computes a medium overhead price to the direct costs of producing goods and is suitably done during the overhead of a firm is moderately associated with the direct costs of production. ABC-Activity-based costing recognizes each of the particular overhead actions compared to the production of a specific product.