Ezy Tax is a tax accounting firm offering an income tax preparation service for small businesses...

    

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Ezy Tax is a tax accounting firm offering an income tax preparation service for small businesses and individuals. The firm charges individuals $149 per return and small businesses are charged $399. Individual returns are normally relatively straightforward to process and the firm uses the ATO's free etax software to prepare and submit the returns. The individual returns do not tend to vary much in the workload required to complete them. The processing of small business tax returns is more complex and requires a specific software package that EzyTax has purchased for an annual licence fee of $25,000 plus $2.50 for each return processed. Processing of business returns varies as to the workload each one requires. The owner-manger of the firm, Jordan Pickford, is concerned that last year only a small profit was made despite the volume of work being higher than ever. She commented: "We are good tax accountants for our clients but we don't seem to be keeping our own house in order!" To help improve the situation Pickford decided to recruit a dedicated management accountant with a proven track record, Yerry Mina. On her first day in the job, Pickford tells Mina "I want you to get to the bottom of our recent poor profitability but I do not want you to buy in expensive 'solutions' which may quickly become out of date and are still prone to error. Also any new systems must be understandable to staff and in some instances clients, whom we must justify our price to." One of the first concerns Mina has is that EzyTax's pricing is not optimal. She has noticed that whilst the firm has been extremely busy with a record number of 9,000 small business returns last year, they have had relatively few individual returns (3,000). Yerry has also done some basic market research where she has found other tax agents charging individuals as little as $100 for a basic return. As a starting point, Mina decides to use an Activity Based Costing ("ABC") approach to help assess the cost of preparing each type of return. From the firm's timesheet and other records she produces the following information for the previous year: Activity Interview client $1,615,000 Obtain Missing data $800,000 Input data $390,000 Verify return with $875,000 client Cost Rectify errors after $40,000 ATO query Submit return $50,000 Other information: - On average each individual takes 20 minutes to interview and each business takes 2 hours. Last year a total of 19,000 hours were spent interviewing clients. Yerry Mina realised that follow-up conversations to obtain missing data relates to business returns only. Data input took a total of 9,750 hours, with it taking an average of 15 minutes for an individual and 1 hour for a business. Verification of the return with the client took an average of 10 minutes for individuals and 55 minutes for small businesses. There were 1,065 returns requiring rectification and only 22 of these were for individuals. Mina calculated that submission time was approximately the same across all returns. Required: 1. Use ABC to estimate the cost of an individual and a business return. Make clear any assumptions you have made. (10 Marks) 2. How might these estimates help explain the poor profitability experienced last year and what implications do they have for the firms' pricing policy? (5 Marks) 3. Yerry Mina uses the ABC approach based on the above data as a 'starting point. Can you suggest any other ways of altering the firms's costing and pricing policies which will also be beneficial to EzyTax? (5 Marks) Ezy Tax is a tax accounting firm offering an income tax preparation service for small businesses and individuals. The firm charges individuals $149 per return and small businesses are charged $399. Individual returns are normally relatively straightforward to process and the firm uses the ATO's free etax software to prepare and submit the returns. The individual returns do not tend to vary much in the workload required to complete them. The processing of small business tax returns is more complex and requires a specific software package that EzyTax has purchased for an annual licence fee of $25,000 plus $2.50 for each return processed. Processing of business returns varies as to the workload each one requires. The owner-manger of the firm, Jordan Pickford, is concerned that last year only a small profit was made despite the volume of work being higher than ever. She commented: "We are good tax accountants for our clients but we don't seem to be keeping our own house in order!" To help improve the situation Pickford decided to recruit a dedicated management accountant with a proven track record, Yerry Mina. On her first day in the job, Pickford tells Mina "I want you to get to the bottom of our recent poor profitability but I do not want you to buy in expensive 'solutions' which may quickly become out of date and are still prone to error. Also any new systems must be understandable to staff and in some instances clients, whom we must justify our price to." One of the first concerns Mina has is that EzyTax's pricing is not optimal. She has noticed that whilst the firm has been extremely busy with a record number of 9,000 small business returns last year, they have had relatively few individual returns (3,000). Yerry has also done some basic market research where she has found other tax agents charging individuals as little as $100 for a basic return. As a starting point, Mina decides to use an Activity Based Costing ("ABC") approach to help assess the cost of preparing each type of return. From the firm's timesheet and other records she produces the following information for the previous year: Activity Interview client $1,615,000 Obtain Missing data $800,000 Input data $390,000 Verify return with $875,000 client Cost Rectify errors after $40,000 ATO query Submit return $50,000 Other information: - On average each individual takes 20 minutes to interview and each business takes 2 hours. Last year a total of 19,000 hours were spent interviewing clients. Yerry Mina realised that follow-up conversations to obtain missing data relates to business returns only. Data input took a total of 9,750 hours, with it taking an average of 15 minutes for an individual and 1 hour for a business. Verification of the return with the client took an average of 10 minutes for individuals and 55 minutes for small businesses. There were 1,065 returns requiring rectification and only 22 of these were for individuals. Mina calculated that submission time was approximately the same across all returns. Required: 1. Use ABC to estimate the cost of an individual and a business return. Make clear any assumptions you have made. (10 Marks) 2. How might these estimates help explain the poor profitability experienced last year and what implications do they have for the firms' pricing policy? (5 Marks) 3. Yerry Mina uses the ABC approach based on the above data as a 'starting point. Can you suggest any other ways of altering the firms's costing and pricing policies which will also be beneficial to EzyTax? (5 Marks)