Table of Contents
1. Assignment Submission Group 1
2. Executive Summary 2
3. Abstract 4
4. Introduction 5
5. Analysis 7
6. Summary 20
7. References 22
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Executive Summary
The main objectives of this report are to provide an analysis and evaluation of
the profitability of Survey Masters, to suggest improvements for the cost allocation of
its projects and to propose strategies for Survey Masters to gain higher profit margin.
Methods of analysis include traditional product costing and activity-based costing.
The report also investigates the fact that the analysis conducted has limitations.
Some of the limitations include there is no clear criterion set by Survey Masters for
separating large projects from small projects and the possibility that there might be
parts of the projects or activities that were not recorded or missing although the records
were kept carefully by the company; which in turn can impact the accuracy of the
analysis. Other limitations are the current economic conditions, data limitations as
there is not enough data provided i.e. monthly details are not known and the results
are based on past performances, not present.
Results of data analysed show that the large projects are more money-making
than the small projects. In particular, the overhead costs for the former which include
the number of trips per project, the total days taken for data collection and the total
pages for the report are lesser than the latter. Based on this, the report observes that
the activity-based costing is more appropriate to be used by Survey Masters rather
than the traditional product costing.
Recommendations discussed include:
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● Survey Masters should continue to provide services for both small and large
projects provided that the Company has a clear strategy in selecting the
projects.
● The company would need to upgrade their data collection process with a more
cost-effective method.
● Online platforms should be utilized to reach the target market more effectively.
● Survey Masters could also set standards or rules for client’s selection such as
developing a minimum threshold to filter out the small projects.
● Survey Masters may opt to focus on expanding the numbers of large projects
to gain higher profit margin contribution.
● The company can enhance its Employees’ Rewards Program to improve its
employees’ satisfaction by rewarding employees each time they secured a new
client and awarding high-performing employees.
● The company should conduct a market survey by benchmarking the revenue
and overhead within the same industry.
Abstract
4
Survey Masters’ founders were contemplating on which projects the company
should focus on to bring more income to the business. Their accountant has done
analyses on the profitability of each type of the company projects using the traditional
product costing. The outcome of the analyses revealed that the small projects were
more lucrative or at least equally profitable than large projects. However, the analyses
did not really help the partners in their decision-making process to set the future
direction of the company. Through activity-based costing, the partners were able to
uncover that they were able to generate more revenues through the large projects. This
report is a study and evaluation on the financial performance of Survey Masters and
will address the impact of the activity-based costing to improve its financial position.
Introduction
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Allocation of costs can be considered one of vital elements to a business. A
price which fails to cover all the costs will not generate profit to a business thus leading
to its downfall. As business environments are evolving, more processes and activities
are required in satisfying customers’ requests. Due to these many processes and
activities done by a business, costs raised from these processes may be difficult to
reflect straightforwardly to a product line or a service provided. These costs are
overhead costs (Marshall, McManus and Viele, 2019). Hence, this requires a shift in
cost accounting methods.
Activity-Based Costing (ABC) is a system able to recognise the activity that
incur cost (cost drivers) and reallocate the cost to a cost object. Due to that, this system
has several impacts to the business. The good part of using this method is it reflects
costing more precisely than the traditional methods. By able to recognise and
understand the cost drivers, this method gives a better insight of the comparative
profitability of a product or service. Not only that, it contributes to a more effective
services or production management as the analysis provides the information enabling
the managers to control and plan the cost (Reyhanoglu, 2004).
The downside of implementing ABC is it consumes a lot of time in collecting
and preparing the data since ABC is a complex and more detailed costing analysis.
Further, due to the difficulties in preparing the data, it might cost more to perform the
analysis. Besides, an inappropriate choice of cost drivers and activities may lead to
inaccurate results.
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One of the partners of Survey Master LLC started to question its future
direction of the company. This is due to the uncertainty of which projects were the
most profitable. Based on the above, the report finds that ABC analysis will give a
better insight of the current situation of Survey Master LLC and may act as an aiding
tool for the partners for decision making.
Analysis
1. Comment on the analyses prepared by Linda Evans in Exhibit 2. Why do
smaller projects appear to be more or at least equally profitable as larger
projects?
Based on Linda Evans’ analysis in Exhibit 2, the smaller projects appear to be
more or at least equally profitable as larger projects because the traditional product
costing system is used which the project salary is the basis for dividing the overhead
cost rather than activity-based costing. The cost driver chosen was project salary
which is $400,000 for both small and large projects. The result shows that the profit
of the smallest 100 projects is $400,000 where it is doubled the profit from largest
projects.Similarly when dividing projects into largest 60 projects and smallest 60
