PROJECT
Required:
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, the president of Holzmann Cleaning Services (HCS). Prepare a report and supporting exhibits for Gretel on 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 and by client type based on Exhibit 1 in Project Details. Your discussion should highlight significant changes between 20X5 and 20X6 operations and between 20X6 actual and 20X6 budgeted operations.
2. Costing analysis :
a) Calculate overhead applied and the resulting over- or underapplied overhead using the actual direct labour hours and the allocation rate and comparing to actual overhead. Base this on the existing method of allocating service overhead using direct labour hours as the allocation base. The actual wages and benefit rate was the same as budgeted at $13.20 per hour.
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. Make a recommendation regarding the use of direct labour hours to estimate cleaning supply costs and/or transportation costs. Explain your reasoning using information provided by the regression analyses that were provided. Discuss both statistical significance and economic plausibility.
c) Using the regression analysis equation chosen in part b), recalculate the overhead application rate by recalculating the cleaning supplies cost into the variable and fixed components. Calculate the over- or underapplied overhead by applying the overhead using the new application rate. Provide an analysis of the differences between the two application rates. This analysis should accompany the calculations.
d) Using activity-based costing (ABC) and the information in Exhibit 2 in Project Details, include 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 comparing profit margins between both commercial and residential operations. (4 marks) Provide three points that highlight the reasons for the difference between cost allocations using ABC and traditional costing. These points should accompany the activity-based calculations.
e) Provide overall comments on the results of these analyses in your report.
In addition to the above, 3 marks are awarded for report format and professionalism. Your report should clearly communicate the important details of the case and effectively persuade the reader to act on your advice.