Intermediate Management Accounting

Assume the role of a partner in Martine’s consulting business. Martine has asked you to assist
her with completing the analysis and developing a report for Gretel. Prepare a report and
supporting exhibits for Gretel, president of Holzmann Cleaning Services (HCS), to analyze
HCS’s current profitability and provide analysis of the overhead allocations used. It should
include the following:

1. Profit analysis: Prepare a brief high-level overview of the 20X6 results in total based on
   Exhibit 1 in the project details document. Your discussion should highlight significant
   changes between 20X5 and 20X6 operations, and between 20X6 actual and 20X6
   budgeted operations. (8 marks)
2. Costing analysis: Prepare overall comments on the current method HCS uses to allocate its
   overhead and provide further analysis on ways in which the company can improve its
   costing methods in order to assess and manage its costs. Your analysis should include the
   following:
   a) Calculate overhead applied amount and the resulting over- or underapplied overhead
   for 20X6 using the traditional costing approach. Base this on the existing method of
   allocating service overhead using direct labour hours as the allocation base. The 20X6
   actual wages and benefit rate were the same as budgeted at $13.20 per hour.
   (2 marks)
   b) Use the regression analyses in Exhibit 3 in Project Details to determine the viability of
   each cost driver to predict costs for cleaning supplies and transportation. This should
   include reasons for choosing or not choosing the regression analyses that were
   provided. (3 marks)
   c) Use the regression analysis equation chosen in part (b) to separate the variable cost(s)
   from the fixed cost(s). Only the fixed cost(s) would be categorized with the other overhead costs. With the adjusted overhead costs, follow the traditional costing approach to recalculate the overhead application rate using direct labour hours as the allocation base. Calculate the over- or underapplied overhead by applying the new overhead rate. Compare your result to part (a) and provide an analysis of the differences between the two application rates. (4 marks)

d) Using activity-based costing and the information in Exhibit 2 in Project Details, prepare a partial profit analysis for commercial and residential operations. Use wages and
benefits costs (allocated on the same basis as revenue) and all costs from the activity-based data to prepare a partial operating statement that includes all direct/traceable costs. Compare the segment margins between the commercial and residential operations. (4 marks) Provide three points that highlight the reasons for the difference between cost allocations using activity-based costing and traditional costing. (3 marks)
e) Provide overall comments on the results of these analyses in your report. (3 marks)

Sample Solution