Questions are in the file attached below. ?All the questions are related to each other.
Aardvark Delivery Service (ADS)1 was formed 30 years ago with a
mandate to establish a private delivery system in the country of Aardvark.
By 20X5, ADS was handling close to 30 million pieces of mail and 29
million kilograms of parcels per year.
Arthur Chapman has spent several years working with small-scale
private delivery companies in many countries. Recently, Arthur was hired
by ADS to assist in improving its operating and financial performance.
The owners of ADS were dissatisfied with the recent trend in financial
results (Exhibits 1 to 3). Farid Banai, president of ADS, has called a
meeting with Arthur and Truc Nguyen, operations manager, to review the
PRESIDENT (Farid Banai): From where I sit, the situation doesn?t look
very good. Our volume is fairly constant; however, the deficit keeps getting
larger. We planned to break even in 20X5 but failed to accomplish our
goal. The basic mission of ADS is to provide effective and efficient delivery
services to the entire population and to network with other delivery
services around the world. The vast distances, rugged terrain, natural
obstacles and severe winter weather all contribute to making our job a
great challenge. We calculate, for example, that in the month of March it
costs us $2.75 to send a letter from a small town in our most easterly
region to one of the northern outposts, but our revenue on that letter is still
ARTHUR: Tell me about the profitability of each type of delivery service ADS offers.
PRESIDENT: Letter delivery has not been profitable even after the
installation of more highly automated equipment. We had planned on
express parcels generating the most profit for us; however, the 20X5
results were disappointing. Some of the issues are that other private
carriers are encroaching on the parcel end of our business and the
number of kilograms in sales for express-delivery parcels were less than
budget. ARTHUR: Are there any issues with cost?
OPERATIONS MANAGER (Truc Nguyen): Costs keep rising. The basic costs at ADS
are sorting, delivery, administration and promotion. Here?s a copy of the budget for 20X5
(Exhibit 1). All of the costs have been classified as fixed except for sorting labour, which
is strictly variable.
You?ll notice that we split the sorting costs into labour and overhead and separately
keep track of both classes of parcels, express delivery and regular delivery. Both the
standard and actual sorting labour rates were raised to $20.00 per hour in 20X5. We
don?t plan on increases for 20X6 as our rates are on par with both private and
government-funded delivery services.
I sense that we may not be accurately allocating sorting costs to each of our delivery services. When we implemented the automated sorting equipment for processing letters
two years ago, our margins changed very little. I assumed that variable sorting labour
costs would decrease for letters.
Administration costs are categorized as 20% maintenance costs and 40% janitorial
costs, with the remainder classified as office administration, which includes office
supplies, phone charges and consulting fees. The maintenance and janitorial costs
have remained stable over the past couple of years; however, the office administration
costs seem to fluctuate somewhat, depending on volume.
We split the administration costs as roughly 50% of the total to letters and prorate the
remainder to the parcel services based on total weight for each department. It?s a
fairly large portion of our costs that we arbitrarily allocate to each service.
The allocation of delivery costs to each of our services has been affirmed by our
controller, who has worked with me and an outside consultant to set effective rates and
cost measures. We?ve already confirmed that the 20X5 variance in delivery costs is due
to the increase in fuel prices across the country.
We intend to maintain advertising costs for 20X6 and are confident that it will boost
sales volume. We predict that letter sales will increase to 42 million pieces, while
express-delivery parcel sales will increase to 2.5 million kilograms and regulardelivery parcel sales will increase to 28 million kilograms. ADS?s overall mandate is for
operations to at least break even.
ARTHUR: Has anyone performed an analysis of the sorting and administrative costs to
determine whether these costs have been properly allocated to the services that incur
OPERATIONS MANAGER: We haven?t had the time to properly assess cost allocation.
We contracted a consultant last year to review the costing of our services. She advised
that we allocate costs using an activity-based approach; however, the contract ended 3 / 12 before we were able to implement the plan. I?ve included an illustration of the sorting
process (Exhibit 4) and a copy of the suggested sorting activities and cost pools (Exhibit
5). She also did an analysis of the administration costs, first, to determine a better way
to allocate service department costs (Exhibit 6) and, second, to understand the
behaviour of the office administration costs (Exhibit 7).
ARTHUR: And what about revenues?
OPERATIONS MANAGER: Well, the rates throughout 20X5 were $0.48 for the average
letter, $2.10 per kilogram on express-delivery parcels and $1.05 per kilogram for
regular-delivery parcels. So far, we?ve only been able to justify increasing the letter rate
to $0.49 in 20X6.
PRESIDENT: Things didn?t go too well for ADS in 20X5 (see Exhibit 2) and unless some
changes are made, I don?t see much future improvement. The profits for the standard
letter service appear to be pretty bleak, but our owners refused our request to drop the
letter delivery business.
ARTHUR: So the future is in parcels?
PRESIDENT: When I saw the 20X5 results, that seemed to be the way we were
heading. However, I?m skeptical of this approach until we have a better handle on
costing. That?s what I?m hoping you?ll do for us. As I see it, there are two tasks I would
like you to accomplish:
1. Provide a better allocation of sorting and administrative costs between departments.
2. Take a closer look at the express-delivery parcel opportunities. Many of our
customers who use our letter and regular-delivery service also use the expressdelivery parcel service. I believe there?s a future in this line of business, but for now
we need to increase our bottom line. In support of that, I would like you to investigate
the following two options relating to express-delivery parcels:
? Increase the rate to $2.75 per kilogram. According to marketing, we might lose
2% of our business if we do this. However, due to increases in fuel costs and
demand, many of our competitors are increasing prices as well, so we don?t
expect this decrease in demand to continue. ? Increase our advertising campaign for express-delivery parcels by $500,000. We
expect this will increase our sales by 15%. Well, I guess that?s all for today. We have lots of things to attend to. I hope that you
will be able to give us some advice on what we should be doing.
ARTHUR: Thank you for your guidance and assistance. I?ll begin my analysis
immediately and report back as soon as possible. 4 / 12 Required:
For the first requirement, assume the role of a junior management accountant internal to
ADS. For the balance, assume the role of Arthur Chapman and prepare a report to Farid
Banai, President of ADS. The report should analyze ADS?s current cost allocations and
provide advice for the future. It should include the following:
1. Overview: Provide a high-level analysis of the 20X5 operating variances (Exhibit 3).
The variances in Exhibit 3 are based on the budgeted and actual figures in Exhibits
1 and 2. (8 marks)
2. Analysis: Using the documents provided by the consultant, prepare an analysis of
each of the following 20X5 costs:
a) Sorting labour and overhead: Reallocate the total sorting labour and sorting
overhead costs to each of the departments using the activity-based costing
analysis in Exhibit 5. (10 marks)
b) Administration costs:
i. Service department portion of administration costs: Prepare a comparison of
cost allocations of the janitorial and maintenance departments to the
production departments using the direct and step methods. Use the
allocation bases provided in Exhibit 6 and begin with the janitorial costs using
the step method. Your analysis should discuss which method provides the
most reasonable estimate of service department costs to production
departments and explain why it is the best method. (8 marks) ii. Office administration costs: Review the summary printout of two Excel
regression analyses (Exhibit 7): one that tests the correlation between
administration employee hours and office administration costs and one that
tests the correlation between documents used and office administration
costs. Explain which activity driver is the best representation of cost
behaviour and reallocate the office administration costs to the production
departments using the 20X5 activities provided in the exhibit. As a result, the
office administration costs should be split into variable and fixed portions.
Fixed costs should be allocated among the services using the original
allocation base. (10 marks)
3. Prepare a revised operating statement for 20X5 using the costing analyses from
requirement 2. Provide a short analysis of the results including possible
explanations. (10 marks)
4. Prepare a 20X6 budgeted operating statement using the cost allocations developed in
requirement 2 and the expected costs provided in the case. Assume the following:
a) The average size of parcels will continue to be 0.5 kg.
b) Activity-based unit costs will remain the same for 20X6.
c) The number of bundles for activity-based costing will remain the same. 5 / 12 d) For expedited parcels, the hours used varies by the number of parcels.
e) Service department allocations and fixed costs will be
unchanged. (10 marks)
5. Analyze the president?s two options concerning the express-delivery parcel
business. Your analysis should use the 20X6 budgeted figures and the additional
information provided in Exhibit 8. Based on the quantitative analysis, make a
recommendation and provide your reasons. Your recommendation should include at
least two changes that the organization could make regarding the express-delivery
parcel business. (9 marks)
6. Provide management with at least two observations you have made during your
research that can be considered for future analysis. (2 marks)
Note: In addition to the above, award 3 marks for format and professionalism.
Exhibit 1 Aardva
parcels Total $0.48
$24,249 $48,825 2,051
$ (691) 788
Surplus (deficit) 6 / 12 40,000 $ 6,158
(0) Exhibit 2
Aardvark Delivery Services
20X5 actual results
parcels Total $0.48
$28,224 $51,219 2,100
$ (2,667) 797
$ 527 Letters
Surplus (deficit) 37,800 $ 7,168
$ (2,805) 1 Administration costs are allocated equally to letters and parcels. The amounts
assigned to the two categories of parcels are based on the number of
kilograms of each category handled. 2 Promotion product. 7 / 12 costs are allocated based on advertising campaigns specific to each Exhibit 3
Summary of 20X5 operating variances
Overall ? using exhibits
(191) $ Total $(525) $ 3,975 $ 2,394 (9)
$ (630) $(1,067)
$(1,031) Total variance $(1,976) $(934) $ 107 $(2,804) Exhibit 4
The Aardvark delivery system consists of three main activities:
Aardvark Delivery Services
Mail collection and delivery Operations management of Aardvark has developed a sophisticated grid that
networks the collection and delivery process. The organization contracted a
consultant two years ago to research the most economical and efficient ways
to collect mail. Mail is collected at various periods throughout the day to ensure
that idle time in the sorting process is minimal. Mail is also delivered
throughout the day to ensure that delivery vehicles can make more than one
delivery in a day, thus capitalizing on existing delivery resources. 8 / 12 Pre-sort
After being collected, all mail enters the pre-sort process, where it is separated
into letters and parcels.
Letters are sorted using automated sorting equipment. The capacity of the equipment is
10,000 letters per hour. Letters are sorted by delivery route. A delivery route can consist
of a street, a subdivision or a building.
Separate regular-delivery and express-delivery parcels
After the pre-sort, all parcels are sorted into regular-delivery and express-delivery
groups. Because of the distance from the pre-sort area to the parcel-sorting area, this
step takes longer if there are heavier parcels, as they are moved manually.
Sort regular-delivery parcels
Regular-delivery parcels are manually sorted and combined with letters to be delivered
by the appropriate carrier.
Sort express-delivery parcels
Express-delivery parcels are sorted using a grid that is based on the availability of
more-costly but quicker delivery methods such as air and commercial carriers.
Distribute to mail carriers
Letters and regular-delivery parcels are sorted by route and put into bundles. There is
one bundle per delivery route, regardless of the number of items. These bundles are
distributed to mail carriers, who sort the mail for their routes into the most effective order
for delivering the mail.
Expedite express-delivery parcels
A team of four experts works around the clock to determine the most efficient way to
send express-delivery parcels to ensure 24- to 48-hour delivery. The expediting process
is labour intensive, and different hours are required for each mode of transportation. 9 / 12 Exhibit 5
Activity-based cost analysis of 20X5 sorting costs (in ?000s)
Separate regular and express parcels
Sort regular parcels
Sort express parcels
Distribute to mail carriers
TOTAL SORTING COSTS
(Average weight of parcels is 0.5 kg.) Cost driver
bundle Cost pool
$26,996 Total activity
5,000 Activity-based costing ? 20X5 units of activity (in ?000s)
Separate regular and express parcels
Sort regular parcels
Sort express parcels
Distribute to mail carriers Letters
53,760 2,310 26,880
3,000 2,000 Total
5,000 Exhibit 6
Allocation of service department costs 20X5 Service department costs
square metres 10 / 12 Maintenance Janitorial
500 Express- Regulardelivery delivery
Letters parcels Total 2,800 225 400 3,475 1,200 1,650 1,750 5,100 Exhibit 7
Actual (20X5) and budgeted (20X6) activity Letters
20X5 employee hours (actual)
20X6 employee hours (budgeted)
20X5 documents (actual)
20X6 documents (budgeted) 44,704
67,800 The following summary outputs are the result of two
regression analyses: one that tests the correlation
between administration employee hours and office
administration costs and one that tests the correlation
between documents processed and office
administration costs. The data consist of monthly
observations from the 20X5 historical figures. Note that
employees are responsible for assigning their hours
worked to each of the three operating departments. 11 / 12 Exhibit 8
Data for analysis of express-delivery options Costs and activities specific to
Sorting labour costs (?000s)
Number of administrative
documents processed Option 1:
7,429 Option 2:
8,718 16,170 18,975 Summary of marks
Preliminary analysis of budget versus actual
Analysis of cost allocations
Revised 20X5 statement
Projected 20X6 statement
Report format and professional capabilities
Total marks 12 / 12 8
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