The Cost of an Individual and Business Return - Assignment Example

Name Course Lecturer Date The Cost of an Individual and Business Return Individual Business Interview (0.33/19000) x $1615000 $28.05 (2/19000) x $1615000 $170 Obtaining missing data (2/19000) x$800,000 $84.20 Data input (0.25/9750) x $390000 $10 (1/9750) x $390000 $40 Verification of return (0.17/9750) x $875000 $15.30 (0.92/9750) x $875000 $82.30 Rectify errors (0.17/9750) x $40000 $0.70 (0.92/9750) x $40000 $3.80 Submission return (0.17/9750) x $50000 $0.90 (0.92/9750) x $50000 $4.70 Total %54.95 $385 Assumptions i) The total time for the follow up conversations to obtain data for business returns was the same as for interviewing the business client ii) The total time taken for verification of the return in equal to the data input total time How the Estimates Will Help Explain Poor Profitability and Implications on the Pricing Policy The estimates will be very useful to the company, they will indicate in detail the areas the company is incurring more costs as well as spending more time. The two main things with the company is spending a lot of time on some clients and incurring unnecessary costs from the returns. The estimates will improve the costing system such that the costs per client will reduce significantly. The time spent per client will reduce substantially. All the time spent on the returns requiring clarification will be used to work on new clients. This will improve efficiency; lack of efficient costing system is the biggest area that is making the company to experience poor profitability. Therefore, the estimates will improve efficiency of the costing system; it will reduce the time spent on one client thereby freeing time for the employees to work on new clients(Gosselin 2006). The pricing system of the company will be overhauled; the current pricing policy does not consider the time spent on a single client. However, the estimates will change the pricing policy will be changed; the clients will be charged depending on the time and cost spent on their work. This will change the pricing policy completely. Advantages and Disadvantages of Activity Based Costing Activity based costing is a method of allocating direct expenses and overheads that are related to most important activities of a company. This allows the company a chance to better define the areas of the business that generate most income and profit for the company. The company will be able to classify its inventory in the order of profitability to the firm (Kaplan & Anderson 2013). One of the most important advantages of ABC is that it is a better control tool for high priority inventory. The company is getting a lot of business from small businesses than from individuals, as such; this is the best method to use to control the high priority inventory from the small businesses. It will help the company and especially Katrine Pedersen who is responsible for investigating the low profitability of the company despite the huge backlog of work. She will be able to place tighter controls as well as more frequent controls on the company high priority inventories. These are the inventories that the customer’s request most and they are most common. This will help the company to avoid much ret urns for clarification. As the small business represents the biggest margin of the company profitability, using this method, Katrine Pedersen will be able to monitor the demand from them and hence ensure that the stock levels match demand. She will also use the company resources to prioritise control of high sensitive clients that has lower impact on the bottom line of the company(Kaplan & Anderson 2013). Another advantage of ABC costing system to the company is that it will improve cycle counts; it will also make them to be more efficient. As such, the company will be able to allocate resources more efficiently such that each employee and department is given the required resources for optimal performance. Using ABC, Katrine Pedersen will be able to highlight and make the process of counting clients and scheduling them more efficient. This will reduce the fluctuation of the clients substantially as she will be able to reduce the counts, returns and the time it takes to address to customer queries, interviews and conversation with the clients. Moreover, she will be able to organise the clients in to classes. She can organise the clients according the most frequent, profitable, time taken, amount of work, or any other method that ,the company may deem fit to organise the clients in to classes. This will save the company time and labour as well (Askarany&Yazdifar2007). Notably, the company has been having problems with pricing it services to the clients as Katrine Pedersen identified. The ABC costing method will help the company to cost the clients. This is because this method is more reliable and very accurate as it focuses on the cause and effect of costs and activities in the context of working on the clients work. In addition, the fixation of pricing is fair and correct as the overheads will be billed on the center of appropriate cost drivers. Besides, the company will have a better control of its overheads through monitoring and control as indicated above. Essentially, this method will provide sufficient information to enable the co2mpany to make informed decisions about its profitability of the different clients (Askarany, Yazdifar&Askary2010). On the other side, to be able to apply this method successfully, the company will have to ensure that it has proper standardisation of the clients as well as its costs. This may come at additional cost to the company. Moreover, the company will need a good system of codification of clients and costs; this should be in operation for it to be successful. Although the method will help determine the cause of poor profitability of the company, it will only help determine the monetary values only. It will ignore other important factors and hence it is limited(Askarany, Yazdifar&Askary 2010). Usually, the method of implementing ABC is complex, it is also time consuming and somewhat costly. Althoughit will help the company in the long run, the company will have to incur costs to implement the method and therefore this may worsen the profitability in the short term. Conversely, the company will have to maintain two costing systems. This is because activity based costing does not conform to generally accepted accounting principles and therefore not recognised by GAAP as it cannot be used to external reporting. As such, it will need to systems one for internal and the other for external reports(Askarany&Yazdifar 2007). Essentially, despite its shortcomings, activity based costing is still recognised as a very useful tool of inventory control and for improving profitability. It is also a very effective tool for reducing costs. This method will help the company to improve its profitability and highlight areas that need improvement as well. As such, the company should implement it without fear as it is a proven method. Other Ways of Altering the Firms Costing and Pricing Policies There are other ways that Katrine Pedersencan use to alter the company's costing and pricing policies, these are job costing, process costing, absorption costing and weighted average costing and pricing systems. These systems will be more beneficial to the company. They are the most recent costing and pricing systems. For example, the job order costing and pricing system will accumulate the costs separately for each client. This will enable the company to engage in processing of special and unique orders from the clients. The processing costing will help the company to accumulate costs separately for each process.The systems would enable the company to price and cost each and every client on its own without considering other factors. For this reason, the company would be able to know and determine the profitability of individual client be it personal or small business. This will necessitate future planning and expansion plans of the company as well (Gosselin 2006). References Askarany, D., &Yazdifar, H, 2007, Why ABC is not widely implemented:International Journal of Business 7(1). Askarany, D., Yazdifar, H, &Askary, S, 2010, Supply chain management, activity-based costing and organisational factors: International Journal of Production Economics, 127(2), 238-248. Gosselin, M, 2006,A review of activity-based costing: technique, implementation, and consequences: Handbooks of Management Accounting Research, 2, 641-671. Kaplan, R, & Anderson, S, R, 2013, Time-driven activity-based costing: a simpler and more powerful path to higher profits; Harvard business press. Krishnan, A, 2007,an application of Activity Based Costing in higher learning institution: A local case study; Contemporary Management Research, 2(2), 75. Read More