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ACCM4100 Management Accounting 1

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  • Course Code: ACCM 4100
  • University: Kaplan University
  • Country: United States

Question:

1) Use ABC to estimate the cost of an individual and a business return. Make clear any assumptions you have made.

2) How might these estimates help explain the poor profitability experienced last year and what implications do they have for the firms’ pricing policy?

3) Explain the advantages and disadvantages of ABC, relating your discussion to TaxEzy.

4) Julie Bishop uses the ABC approach based on the above data as a ‘starting point’. Can you suggest any other ways of altering the firms’s costing and pricing policies which will be more beneficial to TaxEzy?

 

Answer:

Answer to Question 1

Apportionment of Cost Drivers:

 

Particulars

Individual

Business

 

Time for Interview (in hrs.)

0.33

2

 

 

a

b

 

% of Interview Client

14%

86%

 

 

a1=a/(a+b)

a2=b/(a+b)

 

% of Obtain Missing Data

 

100%

 

 

c

d

 

Input Data (in hrs.)

0.25

1

 

 

e

f

 

% of Input Data

20%

80%

 

 

e1=e/(e+f)

f1=f/(e+f)

 

Verification of Return (in min.)

10

55

 

 

g

h

 

% of Verification of Return

15%

85%

 

 

g1=g/(g+h)

h1=h/(g+h)

 

Rectification of Errors

22

1043

 

 

i

j

 

% of Error Rectification

2%

98%

 

 

i1=i/(i+j)

j2=j/(i+j)

 

Submit Return

50%

50%

 

 

k

l

 

Cost Estimation under ABC Method:

Particulars

Total

Individual

Business

Time for Interview

$ 1,615,000

$ 230,714

$ 1,384,286

Obtain Missing Data

$ 800,000

$ 0

$ 800,000

Input Data

$ 390,000

$ 78,000

$ 312,000

Verify return with client

$ 875,000

$ 134,615

$ 740,385

Rectify errors after ATO query

$ 40,000

$ 826

$ 39,174

Submit Return

$ 50,000

$ 25,000

$ 25,000

Total Cost

$ 3,770,000

$ 469,156

$ 3,300,844

 

A

A1

A2

Cost Apportion

 

12.44%

87.56%

 

 

C1=A1/A

C2=A2/A

Nos. of Returns

12000

3000

9000

 

D

D1

D2

Cost per Return

$ 314.17

$ 156.39

$ 366.76

 

E=A/D

E1=A1/D1

E2=B1/D2

In the above table the apportionment of the cost drivers has been shown and on the basis of such apportionment the cost estimation under ABC method has been carried out.

The particular estimation that has been made in estimating the cost of an individual or a business return is that the returns from the previous years have been assumed to be of the similar amount to the current amount of returns. This has been done in order to carry out the computations successfully (Thomas and Gilbert 2014).

 

Answer to Question 2

The poor profitability that has been experienced by the firm last year may be due to the pricing policy that has been adopted by TaxEzy. This is evident from the cost estimation that has been carried out under the ABC method. For instance, the apportionment of the cost drivers reveals that the cost must be distributed in a 14% and 86% respectively. This is because the cost when apportioned in hours comes down to 0.33 hours in case of the individual returns and 2 hours in case of business returns. Similarly the percentage of obtained missing data has also been apportioned in terms of hours and the corresponding percentages have been arrived at. The costs have been apportioned in this way with the help of particular cost drivers. Next, the estimated cost has been calculated by computing the total cost of each of the individual and business returns and dividing the amount by the total number of returns. The cost per return that has been arrived at is estimated to be $156.39 per individual return and $366.76 per business return (Selviaridis and Norrman 2014).

Now, it has been mentioned in the case study that TaxEzy offers an income tax preparation service for small businesses and individuals at a charge of $399 and $149 respectively. However, the cost estimates that have been carried out show that the mere cost of an individual return sums up to be $156.39 and that of a business return is $366.76. Thus, this is the exact point where the business is suffering. This is why a very small profit had been incurred by business last year in spite of the work volume being higher than ever. Furthermore, such a finding also concludes that the pricing policy that has been utilized by the firm till now is flawed.

Answer to Question 3

The potential advantages and disadvantages of ABC in relation to TaxEzy can be deduced as follows (Öker and Ad?güzel 2016):

 

Advantages:

  • Attribution of the incurred costs more correctly – the utilization of an ABC based costing system leads to the attribution of the incurred costs more correctly. In case of TaxEzy it can be observed how the application of activity based costing  breaks down the different components in terms of the accurate cost drivers which makes the process of apportioning the costs easier
  • Budgeting – The utilization of the activity based costing will help the management of the firm to create clear budgets. This is because the clear segregation of costs on the basis of transparent cost drivers help the firm to understand and cut back on different costs which may be included in the future budgets that are prepared by the management of the firm
  • Easy to understand – As it is mentioned in the case study that the owner manager of the firm does not want to buy expensive solutions and that the implementation of any new system must be understandable to the staff and in some instances to the clients even as the price of the services should be justified to them too, activity based costing is the potential solution for such requirements. This is because an activity based costing system is easy to understand both by the staff and the customers.

Disadvantages:

  • Expensive to implement – Implementation of the activity based costing is an expensive affair. An activity based costing is much more expensive than traditional costing. Furthermore, along with the implementation process, the costs to maintain the system are high as well. Moreover, TaxEzy needs to train its employees in the utilization and handling of the activity based costing system.
  • Conforming to GAAP – A major issue with the activity based costing is that it does not conform to GAAP. GAAP or generally accepted accounting principles provide the global standards for the accounting treatment that is utilized by the accountants worldwide. However, the fact that the activity based costing system, not conforming to GAAP make it difficult for the accountants to align the particular costing structure with the financial proceedings of the firm. In case of TaxEzy, this particular difficulty must be faced by the accountants of the firm.
  • Time consuming process – The preparation of an activity based costing system is also a time consuming process as the cost accountant has to identify the potential cost drivers and then allocate the costs accordingly

Answer to Question 4

As it can be observed from the activity based costing system, the cost that is incurred in providing the income tax services to the small business and the individual owner amounts to up to $156.39 per individual and $366.76 per business. However, the charge that is applied by TaxEzy from its customers amounts to $149 per individual return and $399 per business return. This indicates that the firm incurs no profit from the individual returns. In fact the firm incurs a particular loss of ($156.39 - $149) $7.39. This is the reason that the firm in spite of huge workload in the previous year has failed to incur the estimated profits. The particular amount that has been charged against the tax preparation for businesses is $399. Thus, the particular profit that the firm incurs in terms of the business returns is ($399 - $366.76) $32.24. However, when the total profit is that is incurred by the firm is computed, the profit of $32.24 is offset by a loss of $7.39, thus reducing the incurred profit to $24.85. Thus, there might be certain alterations, execution of which, will improve the financial performance of TaxEzy. These alterations may be as following:

  • As mentioned in the case study, the accountant Bishop finds out that other tax agents charge individuals as little as $100 for a basic return. However, the cost incurred in providing the individual services to the clients, as computed by activity based costing, is $156.39. Thus, in order to compete with the fellow firms TaxEzy may reduce the amount that is charged from the individual customers and increase the amount that is charged from the small business owners ($399) in order to compensate for the incurred loss. However, that would lead to an unprecedented rise in the amount charged against tax preparation for the small business owners which may in turn lead to loss of potential customers. Therefore, the business owner may consider reducing the cost of providing the services especially to the individual clients so that the profit obtained from sales, increases. The owner may also consider increasing the profit obtained from the business returns so that the profit can be rightly adjusted (Tsai 2014).
  • The owner of the firm may also consider reducing the costs of providing the business services so that the profit earned by the sales of such services certainly increases and the profits are rightfully adjusted. Thus, to be precise the management is left with two major alternatives in regards to the pricing policy. These alternatives are, either the costs incurred in providing the tax preparation services should be reduced or the prices should be increased by a reasonable amount.

Team work is a crucial component in any field of work especially the work culture that has developed in the current times. The capabilities of a team in terms of the dynamics and variance that it can offer will never be possible for a single individual to provide. In case of a team work the different perspectives of the different team members effectively broaden the scope of the range of techniques that can be adopted in order to arrive at the desired solution. I have been fortunate to be a part of such a team and experience the benefits of the team work (Perez-Prado 2017).

 

Group Description

The group consisted of four members including myself. The other three members were John, Lucinda and Raphael. The number of team meetings that were held is eleven meetings. Each of the meetings that were held lasted for a period of four to five hours. The location where the meetings were held was the houses of the respective team members.

My role

The particular role that I had been assigned with was the creation of the analysis framework according to which the assigned project has to be completed. Furthermore, I had to identify the potential sources from which references for the completion of the task, could be derived.

Others’ roles

There had been other three members in the team. John was delegated the responsibility of computing the costs of the services provided utilizing the activity based costing system. Lucinda had to refer to the identified sources in order to list the potential advantages and disadvantages of activity based costing. Raphael lastly had the essential duty of compiling the obtained results by John and Lucinda and designing them according to the framework set by me.

Group Stages 

The different group stages that are used for forming the team effectively are forming, storming, norming and performing. The forming stage essentially refers to the initial stage of integration, when all the team members come together. This stage is generally featured by anxiety and uncertainty (Perez-Prado 2015).

The next stage is known as storming. The conflict in opinion that is a common feature in every tem generally occurs at this stage.

The next stage is known as norming. This is the most crucial stage in terms of formation of the team. This is because norming is the particular stage when the entire team becomes an integrated unit. The individual as well as the team objective is clear to every team member and as a result the team morale is high.

The last stage is featured by the performance of the common objective for which the team had been constructed. This stage is featured by the successful delivery of the assigned tasks by each team member.

My team had also gone through each of the above listed stages and had emerged as a single integrated unit of individuals sharing a common purpose or objective (Woodcock 2017).

Conflict within the group

There had been a particular instance of conflict within the group. Lucinda and Raphael fought over the same job role of compiling the obtained results in accordance to the established framework. I had to step in and resolve the conflict by clearing the facts in hand. Raphael had been a part of a team previously, who had been assigned a similar task. Thus, the particular compilation process in which the obtained results should be designed will be better understood and executed by Raphael. Lucinda on the other hand having a thorough knowledge of costing would better utilize her skills by carrying out the assigned task that is listing the potential advantages and disadvantages of activity based costing. The learning that I acquired through such an experience is the leadership skills that are required in effectively managing a team.

Leadership and decision making in the group

The leadership and decision making in the team had been executed by me. The providence of such a position had been unanimously decided by the team without any disagreements. My team members did place enough trust in me and this made me feel motivated and enhanced my self confidence.

Achievements by the team and scope of improvement

The task that had been assigned to the team had been successfully carried out within the stipulated time frame. Such an achievement according to me is the most important criteria, which matters. The delivered assignment also met the required quality standards signifying that the capabilities or the vast range of expertise that a team could possess, would never match with the capabilities of an individual.

However, potential improvements could also be achieved in terms of team discipline. This is evident from the fact that each of the team members had been absent from one or two team meetings for which an extra meeting had to be conducted. This did reduce the speed of performance of the team.

 

Conclusion

Thus, as it can be concluded from the above discussion team work has effectively taught me to be patient and has made me a believer in the capabilities of team work.

 

References

Hanrahan, S.J. and Pedro, R.A., 2015. Team building activities in dance and discoveries from reflective essays.

Hanrahan, S.J. and Pedro, R.A., 2017. Team-building activities in dance classes and discoveries from reflective essays. Asia-Pacific Journal of Health, Sport and Physical Education, 8(1), pp.53-66.

Öker, F. and Ad?güzel, H., 2016. Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.

Selviaridis, K. and Norrman, A., 2014. Performance-based contracting in service supply chains: a service provider risk perspective. Supply Chain Management: An International Journal, 19(2), pp.153-172.

  Team Writing for Team Building: A Collaborative Writing Approach for Use in Traditional and Online Classrooms of English Language Learners. HOW Journal, 10(1), pp.53-66.

Thomas, D.S. and Gilbert, S.W., 2014. Costs and cost effectiveness of additive manufacturing. NIST Special Publication, 1176, p.12.

Tsai, W.H., Yang, C.H., Chang, J.C. and Lee, H.L., 2014. An Activity-Based Costing decision model for life cycle assessment in green building projects. European Journal of Operational Research, 238(2), pp.607-619.

Woodcock, M., 2017. Team development manual. Routledge.

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