TASK DESCRIPTION

Congratulations!

You have gained a position as vacation student at an accounting firm; T&K Accounting Services.

T&K Accounting Services offers taxation and bookkeeping services to a broad range of clients across Brisbane. The firm was established in 2008 by Terry Thompson and Kerry Chua who met while studying at Queensland University of Technology. Recently Terry and Kerry have recognised a growing need for advisory services from their clients and they have decided to create a new business advisory department. Kerry is very optimistic about the new service and has put forward a plan to invest heavily in advertising and relocate to a larger and more prestigious office in the centre of Brisbane. Terry agreed to this plan however he remains concerned these activities will add substantial fixed costs to the business. Moreover, Terry is worried the forecast for billable hours that Kerry has provided for the new business advisory department may be over optimistic. Kerry, however, remains confident that there is a strong and growing demand for business advisory services and that their investment will pay off.

In your capacity, as vacation student, you have been asked by the two partners of T&K Services to assist them in evaluating their decision to introduce the new business advisory service by preparing the budget for the coming year (2020) along with a scenario analysis to illustrate how changes to the forecast demand for the business advisory department may affect profit for the coming year.

In the past the partners have paid little attention to how support costs are allocated between each department, choosing instead to adopt a simplistic approach whereby most costs are simply split evenly between the departments. However, with the addition of the business advisory department, the partners want to review this method of allocation and wonder whether an activity based costing (ABC) system for allocating support costs would be more beneficial. To assist with their decision, they have asked you to prepare a comparison of allocated support costs under both methods. They have asked that you prepare an email that weighs up the costs and benefits of each system and a recommendation on which method should be used going forward.

ASSIGNMENT TASKS:

In your role as vacation student, the partners of T&K Accounting Services have asked you to review, analyse and comment on two areas of their operations. The requirements for each task are described for you below;

TASK A:

Assist T&K with Budgeting and Scenario Analysis

a) Using the data provided in the ‘Data – 2019 Actuals’ and ‘Data - 2020 Budget Assumptions’ worksheets of the student workbook, complete a budget for T&K Accounting Services for the year ending 30 June 2020.

Complete your calculations using Schedule 1 provided in the student workbook

b) Prepare a Budget Scenario Analysis for the Business Advisory Department.

Consider the following three scenarios related to the 2020 budgeted billable hours for the business advisory department, and calculate the change in net profit for the business advisory department under each scenario:

i) 10% reduction in budgeted billable hours

ii) 15% reduction in budgeted billable hours

iii) 25% reduction in budgeted billable hours

Complete your calculations using Schedule 2 provided in the student workbook

c) Write a Management Report to the partners of T&K evaluating their decision to add the business advisory department. Justify your reasons using your calculations in (a) and (b) above, as well as any non-financial factors that may be relevant.

To visually demonstrate your evaluations, add any relevant graph/(s) to the Management Report using the information in ‘Data – 2019 Actuals’ and ‘Schedule 1’.

TASK B:

Assist T&K with their Indirect Cost Allocation Method

a) 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 2020 budgeted allocation of support costs under the existing method and an activity based approach.

For each of the three service departments calculate and compare;

(i) Total overhead allocated under the current method

(ii) Total overhead allocated using an ABC method

(iii) Total budget net profit using the current method

(iv) Total budget net profit using an ABC method

b) Prepare an email to the partners at T&K Accounting Services advising which method of allocating support costs you recommend going forward i.e. the existing method or an ABC method.

– Justify your response by drawing from your calculations from (a) as well as your knowledge from studying AYB225.