Notes for Chung Associates Accounting Services

For the year 2018 current Service offer Taxation and Bookkeeping actual results are given in the data the allocation of the cost is mostly split evenly with the two departments. There are no actual results for Business Advisory as it hasnt started yet we are still deciding.

You are to assist Chung Associates Accounting with the decision making to introduce the new business advisory service by preparing the budget for the current year 2019 along with the sensitivity analysis to show how changes to the forecast demand for the business advisory department may affect the profit for the year 2019. With the addition of the business advisory service, Chung & Associates Accounting want to review the cost allocation method, whether an activity-based costing system for allocating support costs would be more beneficial or continue with the even split allocation. Prepare a comparison of allocated support costs under the two methods, a management report that weighs up the costs and benefits of each system and recommendation on which method should be used going forward.

Task 1 Assist Chung with the budgeting and Sensitivity Analysis

1. Using the data provided in the Data 2018 Actuals and Data - 2019 Budget Assumptions worksheets of the student workbook, complete a budget for T&K Accounting Services for the year ending 31 December 2019, calculation using the schedule 1

b. Prepare a Budget Sensitivity Analysis for the Business Advisory Department.

Consider the following three scenarios related to the 2019 budgeted billable hours for the business advisory department, and calculate using the schedule 2 the change in net profit for the business advisory department under each scenario:

i. 10% reduction in budgeted billable hours

ii. 20% reduction in budgeted billable hours

iii. 40% reduction in budgeted billable hours

c. Evaluate the decision to add the business advisory department. Justify reasons using your calculations in a & b above.

***Administrative - nb. you will need to complete these cells using your calculations from Schedule 1

Task 2 Assist Chung & Associates with their Indirect Cost Allocation Method

1. Using the data provided in the Data - ABC worksheet of the student workbook along with your own calculations in Schedule 1, prepare a comparison of the 2019 budgeted allocation of support costs under the existing method and an activity-based approach, using schedule 3.

For each of the three service departments calculate and compare;

(a) Total overhead allocated under the current method

(b) Total overhead allocated using an activity-based costing method

(c) Total budget net profit using the current method

(d) Total budget net profit using an activity-based costing method

b. Advice which method of allocating support the costs you recommend going forward is it the existing method or ABC method.

Help with the assignment calculations, please!

DATA FOR TASK 1: 2018 Actual Results 2018 Income Statement for Chung & Associates Accounting Taxation Bookkeeping Total Billable hours Chargeout rate per billable hour Professional labour rate per hour Professional labour hours Revenue Professional labour costs 3200 2200 130 65 2,500 286,000 162,500 123,500 42,500 25,000 7,500 9,900 5,000 5,500 8,580 103,980 19,520 250 $ 150 $ 3,600 800,000 540,000 260,000 42,500 25,000 7,500 9,900 5,000 5,500 24,000 119,400 140,600 1,086,000 702,500 383,500 85,000 50,000 15,000 19,800 10,000 11,000 32,580 223,380 160,120 Gross margin Office staff wages Rent & Utilities Printing & stationary IT Support Advertising Depreciation Client entertainment costs Total Support Costs Net Profit before tax DATA FOR TASK 1 2019 Budget Assumptions Bookkeeping 5% 5% 1.2 3% Taxation 10% 5% 1.2 3% Advisory Increase in Billable hours from 2018 Actual Increase in Chargeout rate per billable hour Professional labour per billable hour Increase in Billable hours Chargeout rate per billable hour Professional labour rate per hour Professional labour per billable hour 3,000 280 180 I labour rate per hour Budgeted Support Cost Assumptions Note on the allocation of support costs: Client entertainment costs relate directly to each service department. All other support costs are allocated to each department evenly, that is the total cost is evenly split between each service Office staff wages The firm has one office support staff member, they believe the will need one additional staff member to meet the needs of the new advisory business. Bude t staff is $85,000 annual cost per su Rent & Utilities With the move to the new office location total rent & utilities costs are ex ted to increase by 25% Printing & stationar Total printing and stati costs are expected to increase by 50% IT Support IT costs are expected to remain the same Advertisin Advertising costs associated with the introduction of the new service are expected to double ation Depreciation will remain the same as 2018 Client entertainment costs Client entertainment costs are budgeted at 3% of total service revenue Schedule 1 Complete table using the data provided in the 2018 Actual and 2019 Budget assumption worksheets BUDGET 2019 2019 Master Budget for T&K Accounting Services Taxation Bookkeeping Advisory Total Billable hours Chargeout rate per billable hour Professional labour rate per hour Professional labour hours Revenue Professional labour costs Gross margin Office staff wages Rent & Utilities Printing & stationa IT Support Advertisin Depreciation Client entertainment costs Total Support costs Budgeted Profit before tax Schedule 2 Complete this schedule using the data provided in the Data-worksheets and your own calculations from schedule 1 Budget Sensitivity Analysis-Business Advisory Department Business Advisory Net Profit %Change from Master budget Business AdvisoryBusiness Advisory Business Advisory Business Advisory Business Advisory Business Advisory Net What-if-scenario Profit Billable hours Revenue Labour hours Gross Margin Support Costs Original budget 10% reduction in billable hours 20% reduction in billable hours 40% reduction in billable hours These columns are provided to help your calculation. You may add any additional colums that may help you to calculate the affect of each scenario. DATA FOR TASK 2 To assist with ABC costing, the following cost pools and cost drivers have been identified y department ted u Cost Pool Total expected activity Costs Cost driver Tax Bookk Advi Facili Rent, Utilities Floor Space 380 130 195 IT Su Technical Su # of IT requests 136 r 46 15 75 Support Staff, Printing& Stationery Administrative reciation Billable hours hours Promotional activities Advertising, client entertainment # Clients 200 clients 73 19 108 Use the space below for calculations: ACTIVITY BASED COSTING ALLOCATION OF OVERHEAD COSTS Activity by service Total Cost Activi Activity driver Total activ Cost per Bookkee Prepare a comparison of overhead allocation: SCHEDULE 3: Complete this schedule using the data provided in the Data-ABC worksheet and your own calculations from schedule 1 Existing Allocation of Support Costs ABC Allocation of Support Costs Allocated Support costs $ Allocated Support Costs $ loa3x Bookkeeping Advisory Tax Bookkeeping Advisory Budgeted Profit by Service - existing allocation Budgeted Profit by Service - ABC allocation Net Profit $ Net Profit $ Tax Bookkeeping Advisory Tax Bookkeeping Advisory DATA FOR TASK 1: 2018 Actual Results 2018 Income Statement for Chung & Associates Accounting Taxation Bookkeeping Total Billable hours Chargeout rate per billable hour Professional labour rate per hour Professional labour hours Revenue Professional labour costs 3200 2200 130 65 2,500 286,000 162,500 123,500 42,500 25,000 7,500 9,900 5,000 5,500 8,580 103,980 19,520 250 $ 150 $ 3,600 800,000 540,000 260,000 42,500 25,000 7,500 9,900 5,000 5,500 24,000 119,400 140,600 1,086,000 702,500 383,500 85,000 50,000 15,000 19,800 10,000 11,000 32,580 223,380 160,120 Gross margin Office staff wages Rent & Utilities Printing & stationary IT Support Advertising Depreciation Client entertainment costs Total Support Costs Net Profit before tax DATA FOR TASK 1 2019 Budget Assumptions Bookkeeping 5% 5% 1.2 3% Taxation 10% 5% 1.2 3% Advisory Increase in Billable hours from 2018 Actual Increase in Chargeout rate per billable hour Professional labour per billable hour Increase in Billable hours Chargeout rate per billable hour Professional labour rate per hour Professional labour per billable hour 3,000 280 180 I labour rate per hour Budgeted Support Cost Assumptions Note on the allocation of support costs: Client entertainment costs relate directly to each service department. All other support costs are allocated to each department evenly, that is the total cost is evenly split between each service Office staff wages The firm has one office support staff member, they believe the will need one additional staff member to meet the needs of the new advisory business. Bude t staff is $85,000 annual cost per su Rent & Utilities With the move to the new office location total rent & utilities costs are ex ted to increase by 25% Printing & stationar Total printing and stati costs are expected to increase by 50% IT Support IT costs are expected to remain the same Advertisin Advertising costs associated with the introduction of the new service are expected to double ation Depreciation will remain the same as 2018 Client entertainment costs Client entertainment costs are budgeted at 3% of total service revenue Schedule 1 Complete table using the data provided in the 2018 Actual and 2019 Budget assumption worksheets BUDGET 2019 2019 Master Budget for T&K Accounting Services Taxation Bookkeeping Advisory Total Billable hours Chargeout rate per billable hour Professional labour rate per hour Professional labour hours Revenue Professional labour costs Gross margin Office staff wages Rent & Utilities Printing & stationa IT Support Advertisin Depreciation Client entertainment costs Total Support costs Budgeted Profit before tax Schedule 2 Complete this schedule using the data provided in the Data-worksheets and your own calculations from schedule 1 Budget Sensitivity Analysis-Business Advisory Department Business Advisory Net Profit %Change from Master budget Business AdvisoryBusiness Advisory Business Advisory Business Advisory Business Advisory Business Advisory Net What-if-scenario Profit Billable hours Revenue Labour hours Gross Margin Support Costs Original budget 10% reduction in billable hours 20% reduction in billable hours 40% reduction in billable hours These columns are provided to help your calculation. You may add any additional colums that may help you to calculate the affect of each scenario. DATA FOR TASK 2 To assist with ABC costing, the following cost pools and cost drivers have been identified y department ted u Cost Pool Total expected activity Costs Cost driver Tax Bookk Advi Facili Rent, Utilities Floor Space 380 130 195 IT Su Technical Su # of IT requests 136 r 46 15 75 Support Staff, Printing& Stationery Administrative reciation Billable hours hours Promotional activities Advertising, client entertainment # Clients 200 clients 73 19 108 Use the space below for calculations: ACTIVITY BASED COSTING ALLOCATION OF OVERHEAD COSTS Activity by service Total Cost Activi Activity driver Total activ Cost per Bookkee Prepare a comparison of overhead allocation: SCHEDULE 3: Complete this schedule using the data provided in the Data-ABC worksheet and your own calculations from schedule 1 Existing Allocation of Support Costs ABC Allocation of Support Costs Allocated Support costs $ Allocated Support Costs $ loa3x Bookkeeping Advisory Tax Bookkeeping Advisory Budgeted Profit by Service - existing allocation Budgeted Profit by Service - ABC allocation Net Profit $ Net Profit $ Tax Bookkeeping Advisory Tax Bookkeeping Advisory