Accounting for Managers Cost and Profit

Question: Discuss about the Report for Accounting for Managers of Cost and Profit. Answer: The directors of the company have received three different proposals from their three senior staffs. To analyze the effect of the three proposals, it is important to determine the current and profit structure of the company (DRURY 2013). The cost profit of the company, based on the information of last twelve months, are shown below: Statement of Cost Profit:- Current Structure Particulars Unit Cost p.u. Amount Sales 20000 130 2600000 Variable Manufacturing Cost 20000 50 -1000000 Fixed Maufacturing Cost -400000 Variable Selling Administrative Costs 20000 30 -600000 Fixed Selling Administrative Costs -300000 Profit 20000 15 300000 From the above statement, it can be stated that if the company continues with the current cost profit structure, then it can earn profit of $3,00,000 in total and $15 per unit. In such consequences, it will generate sale revenue of $26,00,000 annually. Proposal of Accountant:- Now, if the company considers the proposal of the accountant, the propose cost profit structure will be as follows: Statement of Cost Profit:- 1st Alternative Particulars Unit Cost p.u. Amount Sales 20000 140 2800000 Variable Manufacturing Cost 20000 50 -1000000 Fixed Maufacturing Cost -400000 Variable Selling Administrative Costs 20000 30 -600000 Fixed Selling Administrative Costs -425000 Profit 20000 18.75 375000 The table indicates that the company can be able to increase its annual profit to $375000 from $300000 and the profit per unit will also increase to $18.75 from $15. The accountant has suggested that the sales volume will not fall if an advertisement campaign will be continued at national level. However, it has been observed that price and demand always inversely proportional to each other. Whenever, price of any commodity falls, the demand of the same uses to increase accordingly and if the price increases, then the demand moves downward (Rios et al. 2013). Power drill is not a necessary commodity and hence, its price and demand will react as per the general economic rule. The accountant has proposed for an advertisement campaign to prevent the fall of the sales, due to increase in price. Therefore, the success of the proposal is fully dependable on the success of the advertisement campaign. If the campaign fails to maintain the current sales level, then the sales revenue, as well a s, the total profit, will fall and the proposal will not be able to fulfill the objective (Horngren et al. 2013). Proposal of Production Manager: The production manager has suggested to improve the quality of the product for increasing the sales volume. The projected cost profit as per the suggestion and expectations of the production manager are calculated below:- 2nd Alternative Particulars Unit Cost p.u. Amount Sales 25000 130 3250000 Variable Manufacturing Cost 25000 55 -1375000 Fixed Maufacturing Cost -400000 Variable Selling Administrative Costs 25000 30 -750000 Fixed Selling Administrative Costs -350000 Profit 25000 15 375000 It is quite evident that, by following this proposal, the company can increase its sales volume to $325000 from $260000. Subsequently, the total profit will also rise to $375000 from $300000. However, the profit per unit will remain same. If the company wish to earn profit in volume then the proposal is quite effective. However, it is not sure that the consumers of the product are interested in improved quality or not (Mitra 2016). If, the improved quality fails to attract more consumers, then the sales volume will not increase as per the projection. In that case, the extra cost for advertisement and production will force the total profit volume to decrease and the profit per unit will also move downwards accordingly (Weygandt et al. 2015). Proposal of Sales Manager:- The sales manager intends to lower down the selling price for first 3 months. The cost profit structure for the first 3 months are shown below: Statement of Cost Profit:- 3rd Alternative Particulars Unit Cost p.u. Amount Sales 10000 120 1200000 Variable Manufacturing Cost 10000 50 -500000 Fixed Maufacturing Cost -100000 Variable Selling Administrative Costs 10000 30 -300000 Fixed Selling Administrative Costs -85000 Profit 10000 21.5 215000 As the table describes, the company will surely earn higher profit per unit to $21.50 than the actual profit per unit of $15. It can also increase its total sales revenue comparatively. The company can sell almost half of last years sales volume within first three months in this year. Moreover, as mentioned above, fall in price can surely increase the demand of the product. However, when, the price will be increased after three months, that can create negative impact on the customers. The sales volume may fall down significantly that time, which may result in decrease of total sales volume. In that case, the additional profit, expected to be earned in the first 3 months, cannot help the company to earn more profits annually (Collier 2015). 2:- The cost profit structure of the company as per the normal estimations are calculated below: Particulars Unit Cost p.u. Amount Direct Material Cost 150000 2.5 375000 Direct Labor Cost 150000 3 450000 Variable Factory Overhead 150000 1.5 225000 Fixed Factory Overhead 150000 2 300000 Manufacturing Cost 150000 9 1350000 Variable Selling Administrative Cost 150000 2 300000 Fixed Selling Administrative Cost 150000 1.5 225000 Total Cost 150000 12.5 1875000 20% Mark Up 150000 2.5 375000 Selling Price 150000 15 2250000 a) Capacity of 200000 units:- Now, if the capacity of the factory is 200000 units, then the cost profit structure of the company will as follows: Particulars Unit Cost p.u. Amount Direct Material Cost 200000 2.5 500000 Direct Labor Cost 200000 3 600000 Variable Factory Overhead 200000 1.5 300000 Fixed Factory Overhead 200000 1.5 300000 Manufacturing Cost 200000 8.5 1700000 Variable Selling Administrative Cost 200000 2 400000 Fixed Selling Administrative Cost 200000 1.13 225000 Total Cost 200000 11.63 2325000 20% Mark Up 200000 2.33 465000 Selling Price 200000 13.95 2790000 From the above table, it can be stated that the selling price for 200000 units will be $13.95. Therefore, the bid for the supply to government department will be as per the following table: Particulars Unit Cost p.u. Amount Selling Price 40000 13.95 558000 Less : Sales Commission 40000 2 80000 Bid Price 40000 11.95 478000 b) Capacity of 180000 units:- For the capacity level of 180000 units, the cost profit structure is calculated below: Particulars Unit Cost p.u. Amount Direct Material Cost 180000 2.5 450000 Direct Labor Cost 180000 3 540000 Variable Factory Overhead 180000 1.5 270000 Fixed Factory Overhead 180000 1.67 300000 Manufacturing Cost 180000 8.67 1560000 Variable Selling Administrative Cost 180000 2 360000 Fixed Selling Administrative Cost 180000 1.25 225000 Total Cost 180000 11.92 2145000 20% Mark Up 180000 2.38 429000 Selling Price 180000 14.3 2574000 According to the above table, the selling price for 180000 units will be $14.30. In that case, the bid price for the government supply will be as per the following table: Particulars Unit Cost p.u. Amount Selling Price 40000 14.30 572000 Less : Sales Commission 40000 2 80000 Bid Price 40000 12.30 492000 3:- Balance Sheet represents the closing balances of assets and liabilities. As costs are Nominal A/c. in nature, such financial items are not included in the balance sheet as assets. The closing balances of several cost related accounts are closed at the end of the year by adjusting it with Income Statement (Deegan 2013). However, some costs can be shown in the asset side of the balance sheet, if the cost is paid in advance for the current year. Such costs are referred as Prepaid Expenses (Weil et al. 2013). There are many costs, which are revenue expenditure in nature, but provide benefits in the following years also, i.e, advertisement cost. In that case, the part of the such expenses, which is attributable to the following years, are shown in the asset side of the balance sheet as Deferred Revenue Expenditure. It should be noted that the costs, which are incurred in cash, can only be shown as assets in the balance sheet, if paid in advance. The non-cash expenses, such as, depreciation or amortization, cannot be treated as assets in the balance sheet in any circumstances (Horngren et al. 2012). 4:- a) Calculation of Overhead Allocation Rate:- Particulars Amount Indirect Cost $ 98,400.00 Direct Labor Hour 25795 Machine Hour 9840 Indirect Cost per Labor Hour $ 3.81 b) Calculation of Total Cost for Special Order:- Particulars Unit Cost p.u. Amount Direct Material 2100 16.1 33810 Direct Labor 1400 12.7 17780 Indirect Overhead 1400 3.81 5334 TOTAL COST 32.61 56924 c) Calculation of Total Cost for Special Order under Machine Hour Rate:- Particulars Unit Cost p.u. Amount Direct Material 2100 16.1 33810 Direct Labor 1400 12.7 17780 Indirect Overhead 525 10 5250 TOTAL COST 38.8 56840 d) Calculation of Minimum Price:- Particulars Amount Minimum Total Cost $ 56,840.00 Nos. of Trailers 350 Minimum Price per Trailer $ 162.40 e) Advantages of Segmented Overhead Cost Pool ABC Costing:- It is very necessary to ascertain the production cost accurately. Production cost is the most important factor for pricing purpose. It is the base of any pricing structure. Hence, the business firms give high focus on accurate production costs and adopt various costing method for calculating the productions costs properly (Kaplan and Anderson 2013). In modern times, the production system has become complicated and advanced. In such scenario, it has become very tough to allocate the costs properly. Activity based costing is the most effective method for such accurate allocation of costs. It divides the various costs under different activity based cost pools and allocates the total costs of different departments into the different cost pools proportionately (Kaplan and Atkinson 2015). Any business department is involved with various types of business activities. Hence, allocation of costs, according to departments, may not provide accurate production costs. Therefore, ABC costing allocates the costs according to the activities and helps the firm to identify actual expenses, incurred for various activities (Azizi 2012). Thus, the production costs, derived from segmented activity based cost pools by using Activity Based costing method can be proved more helpful for proper ascertainment of production costs. Reference:- Kaplan, R. and Anderson, S.R., 2013.Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press. Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. 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John Wiley Sons Rios, M.C., McConnell, C.R. and Brue, S.L., 2013.Economics: Principles, problems, and policies. McGraw-Hill