ACCM 4100 Management Accounting 1 Trimester 3, 2017: Assessment 2 – Excel Assignment And Self Reflection On Teamwork

  Total overhead costs Total hours required                                                                                                
Interview cost   $              16,15,000.00 19000                                                                                                
Cost of btaining missing data   $                8,00,000.00 9000                                                                                                
Input data cost   $                3,90,000.00 9750                                                                                                
Cost of verification of returns  $                8,75,000.00 8750                                                                                                
Return rectification cost  $                    40,000.00 1065                                                                                                
Return submission cost  $                    50,000.00                                                                                                  
Total cost  $              37,70,000.00                                                                                                  
  Individual Business Total                                                                                              
Interview hours per return 0.33 2 2.33                                                                                              
Tota hours allocation 2714.29 16285.71 19000.00                                                                                              
Input data hours per return 0.25 1.00 1.25                                                                                              
Total hours allocation 1950.00 7800.00 9750.00                                                                                              
Verification hours per return 0.17 0.92 1.08                                                                                              
Total hours allocation 500 8250 8750.00                                                                                              
Number of returns rectified 22 1043 1065.00                                                                                              
Overhead allocation under ABC system Individual Business Total                                                                                              
Interview cost  $                2,30,714.29  $              13,84,285.71  $ 16,15,000.00                                                                                              
Missing data cost  $                                   –    $                8,00,000.00  $    8,00,000.00                                                                                              
Input data cost  $                    78,000.00  $                3,12,000.00  $    3,90,000.00                                                                                              
Verification cost  $                    50,000.00  $                8,25,000.00  $    8,75,000.00                                                                                              
Rectification cost  $                          826.29  $                    39,173.71  $       40,000.00                                                                                              
Submission cost  $                    12,500.00  $                    37,500.00  $       50,000.00                                                                                              
Total cost      $ 37,70,000.00                                                                                              
Number of returns processed 3000 9000                                                                                                
Cost per return                                                                                                   
Interview cost per return  $                            76.90  $                          153.81                                                                                                
Missing data cost per return  $                            88.89                                                                                                
Input data cost per return  $                            26.00  $                            34.67                                                                                                
Verification cost per return  $                            16.67  $                            91.67                                                                                                
Rectification cost per return  $                            37.56  $                            37.56                                                                                                
Submission cost per return  $                               4.17  $                              4.17                                                                                                
Cost per return rectified  $                          161.30  $                          410.76                                                                                                
Cost per return not rectified  $                          123.74  $                          373.20                                                                                                
It is assumed that the rectification cost for both the types of returns i.e individual and business is same.                                                                                      
As question is silent about the rectification cost per return of any type.                                                                                            
As it is given in the question that submission time remains same for all types of return. The submission                                                                                       
cost per return of both types is assumed to be same.                                                                                                
Profitabilty analysis under Traditional costing                                                                                                
  Individual Business Total                                                                                              
Amount charged by TaxEzy per return  $                          149.00  $                          399.00                                                                                                
Total returns filled 3000 9000                                                                                                
Total revenue  $                4,47,000.00  $              35,91,000.00  $ 40,38,000.00                                                                                              
Total cost                                                                                                   
Licence fees    $       55,000.00                                                                                              
Other costs    $ 37,70,000.00                                                                                              
Profit     213000.00                                                                                              
Under ABC system Individual Business Total                                                                                              
Price charged  $                          149.00  $                          399.00                                                                                                
Cost per return not rectified  $                          123.74  $                          373.20                                                                                                
profit  $                            25.26  $                            25.80                                                                                                
No. of returns not rectified 2978 7957                                                                                                
Total profit on proceesing of returns not rectified  $                    75,229.95  $                2,05,303.23  $    2,80,533.18                                                                                              
Price charged  $                          149.00  $                          399.00                                                                                                
cost per return rectified  $                          161.30  $                          410.76                                                                                                
profit  $                           -12.30  $                          -11.76                                                                                                
No. of returns rectified 22 1043                                                                                                
Total loss on processing of rectified returns  $                        -270.53  $                  -12,262.65  $      -12,533.18                                                                                              
Total profitabilitiy    $    2,68,000.00                                                                                              
The profitability determined of the TaxEzy firm under the Activity based costing is greater than                                                                                         
the profitability determined under the the system of traditional costing.                                                                                              
Under ABC system the cost of each activity involved in filling the tax returns of individuals and                                                                                         
business units is allocated appropriately on the basis of suitable cost drivers. However, under                                                                                         
traditional costing, which was employed by the firm, the total cost of filing return was not allocated                                                                                        
appropriately and hence it did not provide the accurate costs and profitability of the firm.                                                                                          
The firm’s pricing policy for the returns that are not required to be rectified is correct enough as it                                                                                        
covers the total cost of processing of the tax returns and also it is offering profits to the firm                                                                                          
However, the pricing policy of the firm in relation to the returns that are required to be rectified                                                                                         
is not appropriate as the cost of rectification increases the total cost of processing the tax returns                                                                                        
and thereby causing loss to the tax firm at the given price per return in both the cases of individuals                                                                                         
and business units.                                                                                                  
Advantages and disadvantages of Activity Based Costing:
• The system of activity based costing involves allocating the cost to the products on the basis of the activities involved in producing or processing the goods and services respectively. Hence, it provides the best suitable basis of overhead allocation and apportionment.
• There are two types of activities in which an organisation is involved i.e. value adding activities and the non-value adding activities. Activity Based Costing System helps the management to emphasize on activities that are value adding, ignoring those activities that are not adding any value to the revenue generation.
• The appropriate cost allocation to the different products enables the firm to set an adequate and accurate product pricing policy and to take more appropriate decisions in the complex business environment.
• ABC system provides the more accurate information regarding the cost of the products thereby enabling the managers of the firms to adopt advanced approaches such as Total Quality Management or Business Process Reengineering etc. to improve the productivity and reduce the costs.
• The technique of Activity based costing can be applied to all the overheads cost and not just the production overhead.
• Better insights are provided by the ABC technique regarding what drives the total overhead costs. It supports the fact that overhead costs are not only associated with the volume of production and sales. It facilitates the allocation of non-manufacturing costs also to the cost of a product as these costs also forms significant portion in the total cost of products.
• Through the use of proper analysis of activity based costing, management can make choose the suitable course of action while making make or buy decisions.
Though the system of activity based costing system proves to be an effective method as it provides a scientific approach to determine the accurate cost of the products or services, it still suffers from downsides which are being discussed below:
• The implementation and maintenance of activity based costing system is complex and consumes significant time.
• It is not feasible for the small manufacturing concerns as they cannot afford to implement such costly techniques in their businesses.
• Further, the reports produced under ABC system are not in line with the generally accepted accounting principles (GAAP). Therefore, the firms which have adopted ABC techniques to determine the cost of their products are required to maintain two costing systems and the books of accounts. One for their internal usage and other for the purposes of external reporting and statutory compliances. Therefore, it can be said that ABC system makes the management accounting function more cumbersome.
• ABC technique is also not suitable for the firms manufacturing single or only few products and even if there are overheads which are relatively small then ABC is relevant in such cases.
• Excessive focus on detail and control the costs involved in the production of products may obscure the wide picture of business and might lead the management to lose focus on the strategic objectives of the firm.
There are various method of determining the price of the products of the goods or services which the firm is dealing in.                                                                                    
In the present case of TaxEzy firm which is not dealing in the manufacturing of products but is involved in provision of tax filling services to its clients which are both individuals and business units. In this case the other methods that can be used to determine the price of filling of tax returns are cost plus pricing or market pricing.                                                                                  
Under cost based pricing method a certain percentage of profit is added to the total cost involved in the proving the services. The percentage of profit is based on the desired profit which the firm wants to earn while providing the services. It is further categorised in cost plus pricing and market pricing.                                                                                  
The cost plus pricing can be used by the firm to determine the price it should charge for the returns processed by it. A profit percentage will be added to the total cost incurred in provision of tax filling services. It would be beneficial for the firm because of its simplicity and also it will insure the service providing firm against any changes in the cost. This method will also require the least information to price the service.                                                                                  
Secondly, the price for filling returns can be set on the basis of value of service. Since in the current case the other tax firms are $ 100 for the basic returns from the individuals. Therefore, it can add a certain percentage to the basic minimum price charged by the other firms for the basic returns. The percentage of value addition while processing the returns can therefore be added to the base rate.                                                                                  
·         Further, the reports produced under ABC system are not in line with the generally accepted accounting principles (GAAP). Therefore, the firms which have adopted ABC techniques to determine the cost of their products are required to maintain two costing systems and the books of accounts. One for their internal usage and other for the purposes of external reporting and statutory compliances. Therefore, it can be said that ABC system makes the management accounting function more cumbersome.
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