Costing Model Problems and Outsourcing Survey Services: A Cost

School: Simon Fraser University - Course: ACCOUNTING CPA - Subject: Accounting

TO:Sarah Lehtonen, President, and Owner of Lehtonen Consulting DATE:November 3, 2022 SUBJECT:Costing Model Problems and Outsourcing Survey Services Issue #1-Problems with the Costing Methods Issue Recently LCI has received a complaint from a sales representative, stating that the costing model is inaccurate and does not base costs on actual activities. The issue is whether or not the current job costing method is appropriate for use at LCI. Analysis Currently, LCI uses a predetermined rate to allocate overhead to Jobs A, B and C, while using a single cost driver (total analyst hours). A benefit of this approach is that it's a relatively basic and an easy method to use to allocate overhead. However, there are drawbacks to this approach because it only has one cost driver, which can results in an inaccurate allocation of overhead. Recommendation LCI should use a different approach called activity-based-costing (ABC), which uses multiple cost drivers to allocate overhead instead of only one. This method would be more involved and difficult, but it will have more accurate results. Cost Comparison of in-House Survey's and Outsourcing Survey's Advantages LCI's overall operating costs will decrease and LCI employees will have increased capacity to work on other projects that are more profitable Less time will be spent on survey's, and it will allow LCI to focus on their business operations Disadvantages When survey's are outsourced the quality of the results may be compromised When you outsource there is a chance the business may go out of business, which can result in interruptions because you may need to look for a new company to take over When you outsource functions as this companies may choose to increase prices on a whim, and can even share your trade secrets with other companies Cost Comparison of O'Connell and DFNC O'Connell

They charge $500 per survey, with an additional charge of $28 per hour for the call Using the excel tab "Task #2," the total cost will be $1,261,000 for using O'Connell DFNC They require all fees to be paid in Philippine pesos They charge $200 CAD per survey, with an additional charge of $16 per hour for the call CAD has varied 20% relative to the Philippine peso Using the excel tab "Task #2," the total cost will be $715,000 for using DFNC Using the above information from a quantitative perspective DFNC is the cheaper alternative. However, since this service is in the Philippines there can ne issues related to currency fluctuations and you run the risk of getting poor service, especially with the language barrier. O'Connell is in Canada, where the aforementioned problems will not occur. Recommendation I would recommend that LCI should outsource to DFNC as they will save a total of $282,500 (997,500-715,00), which is a substantial amount of savings. *Refer to excel tab "Task #2," for Calculations