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I. The Electricity Distribution Company (EDC) sells electricity to a variety of residential and commercial The Electricity Distribution Company (EDC) sells electricity to a variety of residential and commercial customers. The Billing Department (BD) at EDC provides account inquiry and bill-printing services for the two major classes of customers - residential and commercial. At present BD services 70.000 residential and 12,000 commercial accounts. The profitability of the company is currently being affected significantly by two factors. First. increased competition in the power sector leading to lower tariffs by competitors, so EDC must finds ways of reducing its operating costs. Second, the demand for electricity will increase in EDC's main geographical area because of plans for housing developments and commercial construction. It is estimated that demand from residential customers will increase by 20 % and commercial demand will increase by 10% during the next year, Because the BD is currently operating at full capacity, it needs to find ways to create capacity to serve the increase in demand. A local service bureau has offered to take over all the function of BD at an attractive lower cost (compared with current cost) at Rs. 3.50 per account. Exhibit 1 depicts the present traditional accounting system in the BD. All the costs associated with the BD are indirect, they cannot presently be traced specifically and exclusively to either customer class in an economically feasible way and are allocated on the basis of number of accounts. There were about 85% residential accounts & and hence 85% cost was charged to them and commercial accounts were charged with 15%. Exhibit 1 : Billing Department - Traditional costing System, January 20XX. Indirect cost pool Rs. Salaries 1.50,000 Building Rent 60,000 Telecommunications 30,000 Computers & Printers (Depreciation) 35,000 Printing 15,000 Paper 40.000 Total 4.30.000 The head of the department believed that actual consumption of time of employees and resources used by the commercial accounts were much more than 15% because of their complexity. Commercial accounts average 40 lines per bill compared with only 1 1 lines per bill for residential accounts. Further only commercial account bills are verified. Given the current situation it was felt that an understanding of the BD activities and their costs was essential before taking any decisions. It was decided that a team of managers from head office of EDC will be sent to undertake an activity-based costing for the department. The first step the team undertook was to identify the activities, After interviewing the employees of the department and studying the processes it was determined that the costs in exhibit ] supported four major activities - Account billing. Bill verification, Account inquiry and Correspondence. The next step was to understand how much resources were being consumed by different activities. It was learned that all the four activities required time of personnel. While 45% of the time was spend in account billing, about 35% of the time was used for handling account inquiry activities and another 10% on correspondence and the balance for bill verification. The people who perform these activities in turn occupy space. Only about 8% of the space is required for computer resources and 2% for telecommunications. About 70% of computer resources and telecommunications are required for account billing and 10% each for the other three activities. In the third step activities required by each account was determined. Out of 1600 employee hours used for account inquiry activity 900 hours were required for commercial accounts and 700 hours for residential accounts. Correspondence is sometimes necessary to solve account inquiries. 700 letters were sent for commercial accounts and 400 for residential accounts. Required i. Using traditional accounting systems a) Determine the cost per unit. Should the BD be outsourced? b) There were 7800 inquiries during the month of February. What is the cost per inquiry' ii. Using an Activity based costing system a) Determine the cost of residential and commercial accounts b) Indicate options to reduce costs, c) Comment on outsourcing BD activities. d) There were 7800 inquiries during the month of February. What is the cost per inquiry