Could you please~ help on question 1?
1.20X7operating budget for both commercial and residential operations, based onthedetailsprovided in Exhibit4.Theoperatingbudgetwillrequireadjustmentstotheactivity-basedanalysisprovided in requirement2.Indirectgeneral costs shouldbeallocated60%tocommercialand40%toresidential.
(6marks) Provideadiscussionoftheresultsinyour report.(4 marks).
PROJECT DETAILS \"Adding time to your clay" is the slogan of Holzmann Cleaning Services [HGS]. The company was started by Gretel. who began offering cleaning services to support herself while she was in university studying for a business degree. At the age of 21 she was determined to be known as more than a simple labourer who needed to fund her education. She researched different cleaning products and methodologies to deliver a fast and thorough service to her clients. Ten years later. the business has grown in size and has expanded throughout the city and local rural areas. Gretel is the majority shareholder of the private corporation with two other shareholders. The company consists of a full-time staff of three operations managers [one for commercial operations and two for residential operations}. an administrative staff of three. and part-time cleaning staff of over 2m university students. called cleaning agents. Not only is Gretel able to provide high-quality cleaning senrices to her clients. but she is also able to offer university students part-time work. reducing the need for student loans. The company also owns a eet of three vans that are used to transport cleaning agents to and from work sites. Afourth van is available for the operations managers to make site visits if necessary. Gretefs training regimen is thorough as potential hires are trained in the areas of cleaning products. effective cleaning methods and acceptable department when entering a clienfs residence or place of business. Through this training process. which Gretel carries out herself. she is able to hire only those individuals she feels would provide the high-quality service that keeps clients coming back. Recently. Gretel engaged Martine. a GPA and a local consultant. to review the latest operating statement. Gretel is discouraged with the EMS prot margin {Exhibit 1]. Additionally. she is concerned with the cash ow as there are seasonal uctuations in the work. with more work in the months of March and April when many homeowners request more hours for spring- cleaning chores. As such. Gretel must ensure that there is enough cash on hand to build cleaning supplies inventories and pay for training of any new recmits required to handle the extra work. IEither than springtime. cleaning supplies inventory on hand is minimal. She is hoping that Martine will provide some guidance that will help the company attain its prot margins. She has called a meeting with lvlartine. Sam. the operations manager of commercial operations and Ling. one of the operations managers of residential operations. GRETEL: I thought we had a pretty good year; sales were up, and we've had great reviews. Yet when I look at the bottom line. the prot margin is only 9%. l was hoping for at least 12%. According to industry statistics. the prot margins should be at least 25%. The other issue is that we were short on cash in the late summer. HARTINE: Have there been any signicant changes in the operations in the past year? LING: I've noted that we're taking on more residential clients outside the city. I've had to make sure that we schedule in more travel time to reach the destination on time. 5AM: And don't forget that at the request of a majority of our commercial clients. we've included more eco-friendly cleaning products. It helps boost their image of being socially responsible. HARTINE: I can imagine that this has increased both your travel and cleaning supplies costs. How do you currently cost out your services and how do you arrive at a charge-out rate? GRETEL: We treat the wage costs of our cleaning agents as direct costs. The cost of cleaning supplies, transportation and operations managers+ salaries are considered overhead. We apply the cvemead at $10 per direct labour hour and add on an additional 60% to arrive at our charge-out rate. HARTINE: Have you ever taken an activity-based approach to costing your services? Besides the increase in cleaning supplies' costs. are there some other signicant differences in the costs consumed by your commercial clients versus the costs consumed by your residential clients? LING: Well, I've had a bit of free time on the residential side so |*ve helped Sam out on occasion with the commercial side. I've noted that most of the commercial clients are clustered around the downtown core. So it takes less time to travel there. GRETEL: Because our commercial clients have in-house accounts payable departments. we usually only bill them once per month. While our more recent residential clients are on monthly billing. we still have some that are on weekly billing. However, you should note that we spend almost three times more hours training cleaning agents who work for our commercial clients than training those wl'lo work for our residential clients. Part of the reason is that coo-friendly products require more application knowledge. HARTINE: So I understand that the operations managers are not that busy on the residential side? What's the breakdown between residential and commercial clients? GRETEL: We have about 12C.I regular commercial clients. They account for 69% of the revenue. even though they amount to less than half of the clients. As for the residential side. I'm not sure we require both full-time operations managers. Alex has gone home early on some days because there was a shortage of work. HARTINE: And are your cash disbursements pretty much in line with your revenues? GRETEL: Fer the most part. Our major expenses are cleaning supplies and transportation. which mostly uctuate with revenues. except for annual preventive maintenance on our vans. which takes place in the slower months of July and August. Oh, and one more thing: I would really like a solid way of giving a potential client a quote before we begin a contract with them. Right now. I measure the square metres and estimate how many hours it will take to complete the work. I multiply that by the direct labour hourly rate and then add on our $10 overhead factor per direct labour hour and 60% for prot. Any ideas? HARTIHE: Let me work on this and get back to you with a full report. In the week following the meeting, Martine spent time with Gretel. the operations managers and the administrative staff. She developed the following: - cost pools for indirect costs related to cleaning services along with the cost driver for each pool and activity breakdowns for residential and commercial clients {Exhibit 2] a regression analyses summary results {Exhibit 3] to determine the statistical relationship between: o direct labour hours and transportation costs o direct labour hours and cleaning supplies costs I details regarding expected growth for 20):? {Exhibit 4) I details regarding a typical commercial and residential client that could be used to develop quotes {Exhibit 5} - details relating to cash collections and disbursements (Exhibit B] Exhibit 4 20X7 expected growth data Change in dollars: Expected revenue growth (due to increase in charge-out rate to $39 per hour) 8% Expected increase in cleaning supplies costs due to increase in volume (residential and commercial) 7% Expected increase in commercial cleaning supplies costs due to price increase 9% Labour wage and benefit rate per hour $13.46 Expected increase in transportation costs 9% Change in activity for ABC analysis: Increase in overall square metres of cleaning 7% Increase in number of invoices (commercial only, see option 2 below for residential) 5% Increase total kilometres driven (30% of total kilometres relate to commercial clients) 8% All other expenses will be unchanged. Cost reduction options: 1. Reduce operations management staff costs by putting one residential operations manager on half-time. This would reduce the total cost from $120,000 to $100,000. 2. Change all residential billing to monthly. This would reduce the number of residential invoices sent out by 10% from 20X6 activity.Exhibit 5 Client data for contract quote development According to Gretel, a cleaning agent is able to clean approximately 50 square metres per hour, on average. Base the annual sales amount on 50 annual visits for commercial clients and a per-visit basis for residential clients. Use the following variable costs: . Wages and benefits - see 20X7 budget and information in Exhibit 4 for hourly rates. . Cleaning-supply costs - see 20X7 budget and information in Exhibit 4 for rate per square metre. . Transportation costs - see 20X7 budget and information in Exhibit 4 for rate per kilometre. Commercial client: Typical commercial client details are as follows: . square metres 1,950 . kilometres driven per visit (round trip) 20 Residential client: Typical residential client details are as follows: . square metres 232 kilometres driven per visit (round trip) 25Exhibit 6 Cash collection and disbursement activity May June July August September October Sales revenue $85, 100 $62,900 $67,155 $49,210 $50,875 $68,265 Purchases of cleaning supplies $7,664 $7,240 $7,500 $6,850 $6,900 $7,575 Transportation costs $2,022 $1,904 $2,323 $2,377 $1,327 $1,475 Direct labour wages $30,360 $22,440 $23,958 $17,556 $18,150 $24,354 Management salaries $25,417 $25,417 $25,417 $25,417 $25,417 $25,417 General operating expenses $2,390 $2,390 $2,390 $2,390 $2,390 $2,390 Cash collections: Cash sales 25% Credit collections: Amount collected in month of service 50% Amount collected in month following service 30% Amount collected in second month following service 15% Uncollectable 5% Cash disbursements: Transportation 100% Paid in month incurred Cleaning supplies 60% Paid in month incurred 40% Paid in month following Direct labour 50% Paid in month incurred 50% Paid in month following Remaining expenses 100% Paid in month incurred Additional notes: Depreciation included in monthly general operating expenses $ 196 Annual dividend payment to three shareholders, paid in August $8,000 Expected July 1 beginning cash balance $5,000
