06-12c Outsourcing Services Inc - 1000 Words

Case 06-12 Outsourcing Services, Inc. Outsourcing Services, Inc. (OSI), a SEC registrant, provides a variety of EDP and payroll processing services to third parties. OSI recently has introduced a new service line to provide product help-line support services through customer service representatives (CSRs) who are employees of OSI. On January 1, 2004, OSI entered into a service contract with Company X. Pursuant to the terms of the contract, OSI’s CSRs will provide technical support for Company X’s products. The contract has an initial term of one year and is not cancelable by the customer. After the initial year, the contract is renewable at negotiated market rates. Prior to starting this new service line, OSI hired independent consultants†¦show more content†¦Cost Deferral Policy In the past, OSI had not entered into transactions in which significant up-front costs were incurred in connection with the set-up and origination of its contracts, and, accordingly, O SI has not adopted a policy for accounting for these types of costs. OSI has indicated it plans to adopt a policy of deferring all up-front costs related to this contract including system set-up costs, sales commissions, and other contract acquisition costs. Management of OSI believes they will recover these costs and generate substantial profits through their call revenue (initial term and renewal periods), and the up-front costs incurred are a necessary investment in the contract. Based on customer lifting studies performed by an outside consultant and other industry statistics, OSI expects its contract with Company X to extend beyond the initial contract term and estimates a customer life of approximately 4.5 years. The total fees (set-up fee and call revenue) over the customer life are expected to exceed the direct costs of the contract, including amortization of the deferred costs before any indirect or Selling, General, and Administrative costs. Copyright 2005  © Deloitte Development LLC All Rights Reserved. Case 06-12: Outsourcing Services, Inc. Page 3 Required: †¢ Question 1: Is the accounting policy proposed by OSI to deferShow MoreRelatedExxon Mobile Capstone40455 Words   |  162 Pagesnatural gas; and recovery of hydrocarbon liquids. Firms may operate oil and gas wells on their own account or for others on a contract or fee basis.6 Supplier Power: Suppliers are mining and drilling equipment manufacturers. They provide support services on a fee or contract basis. The demand for oil drilling rises as the price of crude oil rises. As the demand rises, suppliers can charge a higher price per hour; hence, supplier power is cyclical. In an up cycle, the suppliers have power; in a down