Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 28

Cost Data for Managerial Purposes

Tom’s Tax Services is a small accounting firm that offers tax services to small businesses and individuals. One of Tom’s major clients, the Orange Cafe, is considering moving its business to another tax service closer to its location that has promised lower fees. Currently, the costs and revenues at Tom’s Tax Services are as follows:

A		B	C
1	TOM’S TAX SERVICES
2	Annual Income Statement
3
4	Sales revenue	$ 720,000
5	Costs
6	Labor	477,000
7	Equipment lease	50,400
8	Rent	43,200
9	Supplies	32,400
10	Tom’s salary	75,000
11	Other costs	22,800
12	Total costs	$ 700,800
13	Operating profit (loss)	$ 19,200
14

If Tom loses the cafe’s business, he can save $60,000 in labor costs. Tom also estimates that he can reduce equipment leases by about 10 percent, supplies by 5 percent, and other costs by 15 percent.

Required

a.What are the differential costs that would be saved as a result of losing the cafe’s business?

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b.Tom currently collects about $75,000 in fees from the cafe. How much could he offer to reduce the fees and still not lose money on this client?

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c.What considerations, other than costs, are necessary before making this decision?

Step 1 of 6

Accounting systems

Purpose of creating accounting information system is to provide information for decision making of accounting users. Users can be classified as primary users like investors, government, creditors etc. and secondary users like internal including managers or employees. Accounting systems are also classified as financial and costing accounting system also differentiate between the users like primary and secondary ones.

Cost accounting

This system is designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.