ITC June 2015 Paper 1 Question 2 Solution

7/24/2019 ITC June 2015 Paper 1 Question 2 Solution

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PAPER 1 QUESTION 2 ITC JUNE 2015 SUGGESTED SOLUTION

SAICA 20151

Candidate Marker a b c

4224 9 9

Part (a) Critical analysis and discussion MarksREVENUE, OPERATIONS and PROFITABILITY PERFORMANCE

Operating profit Actual Budget Variance

Revenue (Billings) 15 590.9 15 200.0 2.6%

Operating costs 15 175.0 13 200.0 15.0% C

Operating profit 415.9 2 000.0 -79.2%

Operating cost % 97.3% 86.8% 12.1% C

Operating profit % 2.7% 13.2% -79.7% C

Costs as a % of revenue

Direct salaries 35.9%

Laptop rentals 0.9% Allocated overheads 51.0%

Partner salary 9.6%

Analysis of Revenue

Tranter/total revenue 79.2%

Quake/total revenue 18.9%

Professional staff contribution TotalR000

Billings 15 590.9

Annual professional staff salary 6 795.0

Annual contributionby professional staff 8 795.9 C

Contribution by professional staff/Revenue ratio 56,4% C

Mark-up per staff category Partner Managers TraineesStandard rate per hour (R) 2 800 1 600 750

Cost per hour (Total cost / billable hours) (R) 938 406 153

Contribution per hour (R) 1 862 1 194 597

Mark-up 198.7% 293.9% 389.8% C

Hourly contribution margin % 66.5% 74.6% 79.6% C

Interpretat ion and Commentary

Revenue

1. Division is overly reliant on two clients, Tranter and Quake, collectively representing 98% oftotal revenue

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2. The favourable Revenue variance are most likely as a result of the once-off assignmentof

200 hours for Quake and the new Vhakuni audit (if budgeted for)

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3. 16 of the 80 staff(22.5%) were responsible for generating 50% of Rexelors revenue, whichis indicates that the revenue performance of the division has been excellent in comparison tothe other divisions

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Operating costs

4. All costs are fixedresulting in a high degree of operating leverage. 15. The allocated overheadsrepresent 51%of total divisional costs and are likely to be the

reason for the adverse operating profit variance. These need to be investigated urgently.1

6. These costs are not within the controlof the division and are likely to be unavoidable andtherefore distort the performance of the division.

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7. The mark-up%s appear reasonableand one would expect the trainees to have the highest. 1

8. Despite an improvement on total budgeted revenue, the increase in operating costs haveeroded planned operating profit marginsfrom a planned 13.2% to a poor 2.7%

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9. A detailed budgetwould have enabled a more meaningful evaluationof performance. 1


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RECOVERY PERFORMANCE

Partner Managers Trainees Total

Target billable hours 1 600 6 400 17 600 25 600 1

Potential billings (R000) 4 480 10 240 13 200 27 920 1

Hours billed vs worked: Billed Worked

Tranter (10 200/0.8) 10 200 12 750.0

Quake (2 430/0.9) 2 430 2 700.0

Lazier (60/1.1) 60 54.5

Vhakuni (120/0.6) 120 200.0

Nthakeki (75/0.5) 75 150.0

12 885 15 854.5 1C

% of hours worked billed 81.3% C

% of target hours worked 61.9% C

% of target hours billed 50.3% C

Break-even number of hours (15 175 / 1 210) 12 542 1C

Alternative to break-even number of hours Partner Managers Trainees Total

Minimum annual work hours required (Salary / hrly rate) 535.7 406.3 326.7

Minimum annual capacity required 33.5% 25.4% 20.4%

Distortion of billing mix applied

Currently applied (10:30:60) 280.00 480.00 450.00 1 210.00 1Based on actual staff mix (1:4:11) 175.00 400.00 514.63 1 090.63 1

Analysis of target hours Total Billed Workednot billed

Idle time

Hours 25 600 12 855 2 969.5 9 745.5 CC

Rand amount (R000) (based on 10:30: 60 hourly rate) 30 976 15 591 3 593 11 792 C

Rand amount (R000) (based on 1:4:11 hourly rate) 27 927 14 053 3 239 10 629

Interpretat ion and Commentary10. The Tranteraudit would absorb the majority of the divisions available time in Feb to May. As

a result, no other assignments can be performed during these months and staff is under-utilisedduring the rest of the year and given that staff costs are fixed this has a negativeimpact on profitability

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11. Recovery percentageson existing clients are reasonable, but the recovery percentage onnew clients is much lower (Vhakuni and Nthakeni)

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12. The reason for the 2 970 hours worked not billed must be investigatedas it equates toR3 953k(R3 239k) in lost revenue which could have been avoided had trainees be assignedto other divisions during quiet periods

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13. Furthermore revenue from 9 746 hours was lost due to idle timewhich equates to R11 792k(10 629k) which is significant

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14. A 100% recoverywas achieved on the once-off agreed-upon procedure assignmentperformed for Quake and this together with a 110% recoveryon Lazier is excellent

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15. The break-even number of hours is very close to the actual numberof hours billed

resulting in a low margin of safety.

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16. Applying the budget mix of time(10:30:60) results in the distortion of performanceas itignores the fact that there are a different number of staff at each staff level

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17. This distortion results in the performance of the partners and managers being favouredtothe detriment of the trainees

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STAFF UTILISATION PERFORMANCE

Analysis of staff utilisation on Tranter audit billable hours) Billablehours

Hoursworked

Hours available (Feb - May) (17 weeks x 40 hours per week x number of staff members) 10 880 10 880.0 1P

Trantor billable hours; hours worked 10 200 12 750,0

Lazier billable hours; hours worked 60 54,5

Total hours required (Feb - May) 10 260 12 804,5

Spare capacity; (Overtime required) 620 -1 924,5 1C1C

Tranter / Lazier capacity

% capacity exceeded ((12 80510 880)/10 880) 17.7% C

Interpretat ion and Commentary

18. The number of staffare likely to be a function of the Tranter audit, howeveras can be seenfrom the calculations of the capacity required during FebMay, had staff only worked thebillable hours, the division would have been slightly overstaffedduring this peak period.

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19. The extent of overtime worked(around 1 925 hours) by staff during February to May is highand leads to the question of whether a quality audit could still have been delivered.

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20. Using professional staff from other divisions during the peak February to May months

would have reduced the number of trainees needed / the amount of overtime that was worked

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21. How would staff have reacted as it would appear as if staff have not been paid for overtimeon the Tranter audit.

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Available 45

Communication skills clarity of expression 1Total for part (a) 24

Part (b) Calculate the expected revenue in FY2015 Mark

Billedhours

Bi l led ho urs

(Alternative)

Tranter (10 200 / 80% x 90%) 10 200 11 475

Quake [2430200]; 2 230 2 230 1

Lazier 60 60 Vhakuni (120 / 60% x 75%) 120 150

Nthakeni (75 / 50% x 2 x 80%) 150 240 1

Excelsior 240 240 1

13 000 14 395 C

Charge-out rates R

Partner (2 800 x 1,04) x 10% 291.20 1

Managers (1 600 x 1,08) x 30% 518.40 1

Trainees (1 600 x 1,08) x 60% 486.00 1

1 295.60

R000 R000

Forecast revenue [13 000 x R1 295.60](14 395 x R1 295.60) 16 843 18 650 1C

Alternative solution

based on weighted hours rather than weighted rate:

Partner Manager Trainees Total

Weighted Billed hours 1 300 3 900 7 800 13 000 1C1C1C

OR 1 439.5 4 318.5 8 637.0 14 395

Hourly rate 2 912 1 728 810 1 295.60

Forecast Revenue 3 785 600 6 739 200 6 318 000 16 842 800 1C

OR 4 191 824 7 462 368 6 995 970 18 650 162

Available 9Maximum 9

Total for part (b) 9


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Part (c) Analyse the indirect overheads of Rexelor Marks

Analysis of indirect overhead components as a % of total:

Premises rental 31.7% 1

Depreciation of office furniture and equipment 4.1%

IT expenses 6.0% 1

Office supplies, stationery and printing 5.4%

Finance and administration salaries 48.6% 1

Water and electricity 2.9%

Other overheads 1.3%

General comments

22. Rent and salaries are the major coststo be allocated. Time and effort should be focused onallocating these correctly to divisions. The other costs are relatively immaterial.

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23. The basis of allocation should be transparent and fair as this will impact the divisionsperformances and possibly bonuses paidand the more closely alignedwith the usage ofthe underlying resource the more accurate the allocation will be.

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24. Currently, indirect overheads appear to be allocated on the basis of revenue generation(assurance has been allocated 50% of total indirect overheads) which is not necessarily atrue reflectionof their resource consumption.

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25. Both Finance and administrative salaries and costs related to premises are facility

sustaining expensesand most likely fixed and make up 84.43% of indirect overheads. Thusthe allocation of the majority of overheads is most likely going to be arbitrary

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26. It is important to note that the benefitsof the better allocation system should exceed thecost. Rexelor appears to be a fairly small firmand it may be excessively costly to put inplace systems to monitor usage of printing, etc. as well as carry out time and motion studies inthe finance and administration departments

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27. The majority of costs are directly traceableto the division and will therefore not need to beallocated. Only costs that are not directly traceable will need to be allocated

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Costs related to premises

28. The costs related to Rexelors offices should be allocated based on utilisation thereof andrelative floor spaceoccupied would probably be the best indicator. 1

29. Office space costswould include rent, depreciation of office furniture & equipment and waterand electricity and therefore these costs should be allocated on the same basis(floor space). 1

30. The assurance division occupies 20% of spaceand hence this would be their allocation. 1

IT expenses

31. Computers are rented and hence the cost could be allocated based on the head countineach division.

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32. Allocation of the IT expenses relatingto the finance and administrationdivision to otherdivisions should be on the same basis as their salary costs.

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Office supplies, stationery and printing

33. These costs are likely to vary with usagewithin each divisionis there a system in placetomonitor usage? The systems could include print counters and logs of stationery issued.

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34. Usage within the finance & admindivision should be allocated separately to other divisions. 1

Finance and administration salaries35. It may be difficult to allocatethese costs directly to divisions as the relative usage of these

resources could be difficult to quantify.1

36. A time and motiontype study could be performedthe finance activitiescould possibly berelated to number of invoices issued or number of clients.

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37. Theassurance division has five clients, which means the administration of their invoicing,etc., should be relatively simple, however some allocation is required to ensure that theservice is available.

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38. Thehuman resourcesfunction costs could be allocated based on relative head count. 1

39. Should salary costs be allocated? They could be treated as a fixed cost in the business. 1

Available 23

Maximum 8

Communication skills logical argument 1

Total for part (c) 9

Documents

ITC June 2015 Paper 1 Question 2 Solution