Question 1 (12 marks) Holzmann Cleaning Services has prepared the following statement of comprehensive income for the year ended December 31, 20X6. Sales are based on 21,335 direct labour hours and 1,066,757 square metres cleaned or an average of 50 square metres per hour. Sales, wage and benefit costs are affected by the total square meters cleaned. Holzmann Cleaning Services Statement of comprehensive income For the year ended December 31, 20X6 Revenue $821,651 Cost of sales: Wages and benefits Cleaning supplies Transportation costs (including fuel, insurance, depreciation, and maintenance) Salaries of operations managers Total cost of sales 281,624 88,541 30,281 120,000 $520.446 $301,205 Gross margin Operating expenses: Training Billing Depreciation (excluding transportation vehicles) Repairs and maintenance (excluding transportation) Utilities and telephone Rent Interest and bank charges Business fees Advertising and promotion Insurance (excluding transportation) Total operating expenses Net income (Loss) $55,500 129,500 2,350 890 4,620 10,320 1,050 4,200 2,520 2,730 $213.680 $87.525 Cost pools and activities for activity-based costing analysis used for December 31, 20X6, statement of comprehensive income Activity Cost driver Cost Total Commercial Residential pool activity Cleaning supplies - Square metres $70,833 640,054 640,054 commercial Cleaning supplies Square metres 17,708 426,703 426,703 residential Billing Number of 129,500 3,054 1,062 1,992 invoices Transportation Number of 30,281 53,124 15,937 37,187 kilometres Training Number of 55,500 554 416 138 hours Operations Number of 120.000 3 1 2 management managers Total expenses $423.822 The industry benchmark for profit is 25% of revenue. In preparation for the budget for 20x7, Holzmann has gathered the following information: 20x7 expected growth data Change in rates: Increase in charge-out rate to both commercial and residential clients to $39 per hour Labour wage and benefit rate per hour $13.46 Expected price increase in commercial cleaning supplies costs per square metre (no change in the residential cleaning supplies cost per square metre) Expected increase in transportation costs per kilometre 9% Expected increase in advertising of the commercial service $1,000 9% Change in activity for ABC analysis: Increase in square metres 7% Increase in number of invoices (commercial only, see option 2 below for residential) 5% Increase total kilometres driven 8% All other expenses will be unchanged except as noted in cost reduction options. All costs except operations management are variable costs. 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. The ABC rate per invoice would remain the same as 20X6. Required: a) Prepare a complete 20x7 operating budget segmented for commercial and residential operations, based on the details provided above, using activity-based costing where appropriate. Revenue and all costs except those that can be calculated using activity-based costing or have other budgeted changes should be allocated 60% to commercial and 40% to residential. Make sure to comment on the assumptions that were made in developing the budget. (8 marks) Note: When calculating the budget under the activity-based costing, determine the 20x6 current rate per unit of activity first. Then apply the changes in both the rate and level of activity where applicable to determine the new costs. b) Provide a discussion of the results in your report. Focus on the current and predicted profitability of the company. Also consider the profitability of the commercial and residential departments. (2 marks) Your discussion should also include a paragraph on the quality of the budget data, including a review of any external factors that may affect revenues and costs as discussed in Topic 4.2-5. (2 marks)
