PAPER 1 QUESTION 2

Candidate

Marker

ITC JUNE 2015 SUGGESTED SOLUTION

a
24

b
9

c
9

42

Part (a)

Critical analysis and discussion

Marks
REVENUE, OPERATIONS and PROFITABILITY PERFORMANCE
Actual
Budget Variance
Operating profit
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%

Total
Professional staff contribution
R000
Billings
15 590.9
Annual professional staff salary
6 795.0

Annual contribution by professional staff

8 795.9 C
Contribution by professional staff/Revenue ratio
56,4% C
Partner Managers Trainees
Mark-up per staff category
Standard 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
Interpretation and Commentary
Revenue
1. Division is overly reliant on two clients, Tranter and Quake, collectively representing 98% of
1
total revenue
2. The favourable Revenue variance are most likely as a result of the once-off assignment of
1
200 hours for Quake and the new Vhakuni audit (if budgeted for)
3. 16 of the 80 staff (22.5%) were responsible for generating 50% of Rexelors revenue, which
1
is indicates that the revenue performance of the division has been excellent in comparison to
the other divisions
Operating costs
4. All costs are fixed resulting in a high degree of operating leverage.
1
5. The allocated overheads represent 51% of total divisional costs and are likely to be the
1
reason for the adverse operating profit variance. These need to be investigated urgently.
6. These costs are not within the control of the division and are likely to be unavoidable and
1
therefore distort the performance of the division.
7. The mark-up %s appear reasonable and one would expect the trainees to have the highest.
1
8. Despite an improvement on total budgeted revenue, the increase in operating costs have
1
eroded planned operating profit margins from a planned 13.2% to a poor 2.7%
9. A detailed budget would have enabled a more meaningful evaluation of performance.
1

SAICA 2015

PAPER 1 QUESTION 2

Target billable hours

Potential billings (R000)
Hours billed vs worked:
Tranter (10 200/0.8)
Quake (2 430/0.9)
Lazier (60/1.1)
Vhakuni (120/0.6)
Nthakeki (75/0.5)

ITC JUNE 2015 SUGGESTED SOLUTION

RECOVERY PERFORMANCE
Partner Managers
1 600
6 400
4 480
10 240

% of hours worked billed

% of target hours worked
% of target hours billed
Break-even number of hours (15 175 / 1 210)
Alternative to break-even number of hours
Minimum annual work hours required (Salary / hrly rate)
Minimum annual capacity required
Distortion of billing mix applied
Currently applied (10:30:60)
Based on actual staff mix (1:4:11)
Analysis of target hours

Trainees
17 600
13 200
Billed
10 200
2 430
60
120
75
12 885
81.3%

Total
25 600
27 920
Worked
12 750.0
2 700.0
54.5
200.0
150.0
15 854.5
61.9%

50.3%
Partner Managers
535.7
406.3
33.5%
25.4%

Hours

280.00
175.00
Total

480.00
400.00
Billed

25 600

12 855

Trainees
326.7
20.4%
450.00
514.63
Worked
not billed

2 969.5

12 542
Total

1 210.00
1 090.63
Idle time
9 745.5

Rand amount (R000) (based on 10:30: 60 hourly rate)

30 976
15 591
3 593
11 792
Rand amount (R000) (based on 1:4:11 hourly rate)
27 927
14 053
3 239
10 629
Interpretation and Commentary
10. The Tranter audit 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 underutilised during the rest of the year and given that staff costs are fixed this has a negative
impact on profitability
11. Recovery percentages on existing clients are reasonable, but the recovery percentage on
new clients is much lower (Vhakuni and Nthakeni)
12. The reason for the 2 970 hours worked not billed must be investigated as it equates to
R3 953k (R3 239k) in lost revenue which could have been avoided had trainees be assigned
to other divisions during quiet periods
13. Furthermore revenue from 9 746 hours was lost due to idle time which equates to R11 792k
(10 629k) which is significant
14. A 100% recovery was achieved on the once-off agreed-upon procedure assignment
performed for Quake and this together with a 110% recovery on Lazier is excellent
15. The break-even number of hours is very close to the actual number of hours billed
resulting in a low margin of safety.
16. Applying the budget mix of time (10:30:60) results in the distortion of performance as it
ignores the fact that there are a different number of staff at each staff level
17. This distortion results in the performance of the partners and managers being favoured to
the detriment of the trainees

1
1

1C
C
C
C
1C

1
1
C
C
C

1
1

1
1

1
1
1
1
1

SAICA 2015

PAPER 1 QUESTION 2

ITC JUNE 2015 SUGGESTED SOLUTION

STAFF UTILISATION PERFORMANCE

Analysis of staff utilisation on Tranter audit billable hours)
Hours available (Feb - May) (17 weeks x 40 hours per week x number of staff members)
Trantor billable hours; hours worked
Lazier billable hours; hours worked
Total hours required (Feb - May)

Billable
hours
10 880
10 200
60
10 260

Hours
worked
10 880.0
12 750,0
54,5
12 804,5

620

-1 924,5

Spare capacity; (Overtime required)

Tranter / Lazier capacity

% capacity exceeded ((12 805 10 880)/10 880)
17.7%
Interpretation and Commentary
18. The number of staff are likely to be a function of the Tranter audit, however as can be seen
from the calculations of the capacity required during Feb May, had staff only worked the
billable hours, the division would have been slightly overstaffed during this peak period.
19. The extent of overtime worked (around 1 925 hours) by staff during February to May is high
and leads to the question of whether a quality audit could still have been delivered.
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
21. How would staff have reacted as it would appear as if staff have not been paid for overtime
on the Tranter audit.
Available
Communication skills clarity of expression
Total for part (a)
Part (b)
Calculate the expected revenue in FY2015
Billed Billed hours
hours (Alternative)
Tranter (10 200 / 80% x 90%)
10 200
11 475
Quake [2430 200];
2 230
2 230
Lazier
60
60
Vhakuni (120 / 60% x 75%)
120
150
Nthakeni (75 / 50% x 2 x 80%)
150
240
Excelsior
240
240
13 000
14 395
R
Charge-out rates
Partner (2 800 x 1,04) x 10%
291.20
Managers (1 600 x 1,08) x 30%
518.40
Trainees (1 600 x 1,08) x 60%
486.00
1 295.60
R000
R000
Forecast revenue [13 000 x R1 295.60] (14 395 x R1 295.60)
16 843
18 650
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

OR
Hourly rate
Forecast Revenue
OR

1 439.5
2 912
3 785 600
4 191 824

4 318.5
1 728
6 739 200
7 462 368

8 637.0
810
6 318 000
6 995 970

14 395
1 295.60
16 842 800
18 650 162
Available
Maximum
Total for part (b)

1P

1C
1C
C
1

1
1
1
45
1
24
Mark

1
1
C
1
1
1

1C

1C
1C
1C

1C
9
9
9

SAICA 2015

PAPER 1 QUESTION 2

ITC JUNE 2015 SUGGESTED SOLUTION

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 costs to be allocated. Time and effort should be focused on
1
allocating these correctly to divisions. The other costs are relatively immaterial.
23. The basis of allocation should be transparent and fair as this will impact the divisions
1
performances and possibly bonuses paid and the more closely aligned with the usage of
the underlying resource the more accurate the allocation will be.
24. Currently, indirect overheads appear to be allocated on the basis of revenue generation
1
(assurance has been allocated 50% of total indirect overheads) which is not necessarily a
true reflection of their resource consumption.
25. Both Finance and administrative salaries and costs related to premises are facility
1
sustaining expenses and most likely fixed and make up 84.43% of indirect overheads. Thus
the allocation of the majority of overheads is most likely going to be arbitrary
26. It is important to note that the benefits of the better allocation system should exceed the
1
cost. Rexelor appears to be a fairly small firm and it may be excessively costly to put in
place systems to monitor usage of printing, etc. as well as carry out time and motion studies in
the finance and administration departments
27. The majority of costs are directly traceable to the division and will therefore not need to be
1
allocated. Only costs that are not directly traceable will need to be allocated
1
Costs related to premises
28. The costs related to Rexelors offices should be allocated based on utilisation thereof and
relative floor space occupied would probably be the best indicator.
1
29. Office space costs would include rent, depreciation of office furniture & equipment and water
and electricity and therefore these costs should be allocated on the same basis (floor space).
1
30. The assurance division occupies 20% of space and hence this would be their allocation.
1
IT expenses
31. Computers are rented and hence the cost could be allocated based on the head count in
1
each division.
32. Allocation of the IT expenses relating to the finance and administration division to other
1
divisions should be on the same basis as their salary costs.
Office supplies, stationery and printing
33. These costs are likely to vary with usage within each division is there a system in place to
1
monitor usage? The systems could include print counters and logs of stationery issued.
1
34. Usage within the finance & admin division should be allocated separately to other divisions.
1
Finance and administration salaries
35. It may be difficult to allocate these costs directly to divisions as the relative usage of these
1
resources could be difficult to quantify.
36. A time and motion type study could be performed the finance activities could possibly be
1
related to number of invoices issued or number of clients.
37. The assurance division has five clients, which means the administration of their invoicing,
1
etc., should be relatively simple, however some allocation is required to ensure that the
service is available.
38. The human resources function 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
4

SAICA 2015