Managerial Accounting

Date: May 26, 2022

To: Simi

From: Joanna Teresa C Miranda, Consultant

Subject: Detailed Analysis of Career Options

Dear Simi,

I am writing to give you a detailed analysis of your career options based on your circumstances.

Kindly see the calculations and qualitative considerations for each option. At the end of this

business memo, I made a summary to provide my insights on the best options to take.

Option #1 Work at the restaurant as a server at Paulie’s full time

Your first option is to work six hours a day from Monday to Saturday as a server at Paulie’s with

a $19.00 per hour average rate from Monday through Thursday and a rate higher by 10% on

weekends. Based on my calculation, you would earn $36,753.60 per year, calculated as follows:

Monday to Thursday

Friday to Saturday

Total Amount

Since $36,753.60 is your income before tax, we need to compute the tax amount for this option:

Option #2 Continue the painting business under the name of Snazzy Simi’s Swirls part-

time

I understand that you have the option to grow your part-time online retail business as a painter of

cartoon portraits. The following are the details for Snazzy Simi's Swirls' forecasted sales and

income based on your data. Please note that the 2022 details and amounts are estimated since

you could not maintain proper accounting records for that year. Moreover, for the years 2024 and

2025, it was assumed on the calculation that the increase or growth would be 8% in the given

8%-10% range for conservatism purposes.

If you pursued your full-time work at Paulie’s while working part-time at Snazzy Simi’s Swirls,

the annual income would be as follows:

Option #2 would yield a higher salary than if you would only work full-time at Paulie’s.

While we are seeing that there would be a significant increase in sales and net income for Snazzy

Simi’s Swirls if the forecasted amount is near the actual results for the years 2023-2025, I would

like to kindly discuss some observations, implications, and recommendations for this that might

help you in considering whether to continue this part-time business:

Observations Implications Recommendations

1. Social media would be

utilized to attract

customers

While there are evident

benefits in using social

media to attract customers,

there are ethical issues

regarding using social

media, one of which is

privacy. Data is not safe if

posted online, which means

there may be threats to

privacy that the business

would face. Consumer

opinions can also spread

quickly on social media,

which means that the

business’s reputation is

fragile online.

Weigh the pros and cons of

using social media. If you opt

to use social media, ensure that

private and sensitive

information is safe.

2. Only estimated details

were provided for 2022

since there are no proper

accounting records

No accounting records

would mean that you would

not be able to track your

sales and expenses

properly. It is significant to

every business that you

would keep track of every

inflow or outflow to

determine if the business is

viable.

Maintain proper records by

keeping receipts and other

business documents in an

exclusive folder. It would also

be helpful to maintain even an

excel file to record every sale

and purchase in the business.

This way, proper trend

analysis would be performed,

and you can assess the actual

profitability of the business.

3. Packaging and shipping

for each painting would

incur an hour of your

time

Since you were the only

person responsible for

creating and packing your

products, this would be

time-consuming on your

part. This may become

difficult if you choose to

work full-time in Paulie’s

and part-time in Snazzy

Simi’s Swirls.

Assess the implications of

having two jobs before

pursuing Option #2.

4. You would like to know

more about calculating

and analyzing

In calculating and

analyzing profitability, you

may use the following

Profitability ratios evaluate a

company's capacity to create

profits compared to its sales,

profitability and what

tools would be helpful

for your online business

ratios:

Gross Profit Rate = gross

profit / net sales

Profit margin = net income

/ net sales

Return on assets = net

income / average total

assets

operational expenses, balance

sheet assets, or shareholders'

equity over time.

It is essential to use

profitability ratios to check

how efficiently the business

generates profit.

As for the helpful tools, Excel

is one of the most basic

bookkeeping tools. You may

also opt to use Quick books, an

essential bookkeeping tool.

However, this entails

additional costs and may not

be appropriate for the business

since this is only part-time.

5. There is no solid basis

for the forecasted 250

paintings to be sold for

2023

The 250 paintings and 8%-

10% growth are based on

your expectations

One of the accounting

concepts is conservatism.

Since our supposed to be the

base year, 2022, has no clear

accounting records, the

estimated 100 paintings may

become misleading, and we

assume 250 paintings would be

feasible in 2023.

Option #3 Work on Spritzy Gas Station as a Bookkeeper full-time

For the option to work at the gas station full-time, it is assumed on the calculation that you would

incur 36 hours every week to be able to compare the number of hours and hourly rate with

Option #1. Moreover, since you could not provide a forecasted amount for the revenues and

expenses, the calculation assumed that the expected 2023 revenue and costs would be the same

as 2022.

If ever you would decide to work at the gas station full-time, your hourly rate would be $32.84,

or a weekly salary of $1,182.31.

For your concerns about the depreciation method for the fuel terminals, I recommend that you

use the units of production method of depreciation. This depreciation method considers the

actual and practical usage of the asset in the production process. It also allows companies to

show higher depreciation expenses in more productive periods or months. This way, the actual

use of the product would be considered in the depreciation expense to be recorded by the

business.

The formula for the unit of production method is as follows:

Unit of Production method = (Cost – Salvage Value) / Estimated Useful Life in Units of

Production

The journal entry for the depreciation expense is as follows:

Depreciation expense xx

Accumulated depreciation xx

The depreciation expense would be reflected on the income statement under the expenses

section. The normal balance of expenses is debit. Expenses are subtracted from the revenues to

get the net income.

An asset is a debit by nature. The accumulated depreciation, on the other hand, is a contra-asset

account. By crediting accumulated depreciation, it would reduce the balance or amount of its

corresponding asset, which in this case is the fuel terminal. This would be reflected on the

business’ balance sheet or statement of financial position.

Option #4 Work on Spritzy Gas Station as a Bookkeeper part-time and on the Snazzy

Simi’s Swirls part-time

For your option to work part-time at the gas station, the additional expenses for the part-time

help to be hired would be considered. For this discussion, it is assumed on the calculation that

the 2023 revenues would be the same, with the difference of only the expenses to be incurred,

which are 42% of revenue for full-time, and 54% of revenue for part-time.

While the total weekly income for 2023 full-time is higher than 2023 part-time, 2024 part-time is

higher than 2023 full-time since there is growth anticipated for Snazzy Simi’s Swirls.

Option #5 Investing in a Mutual Fund

Investing in a mutual fund is another option to invest your savings. Mutual funds are simple and

accessible to everyone since they are easy to understand and buy, and they can be diversified

since they have broad market exposure. Moreover, mutual funds are usually affordable and cost

less than managing other types of portfolios.

However, a mutual fund’s risk is still credit risk involved, where issuers may fail to pay off the

interest and principal on time. The higher the risk, the higher the return.

A guaranteed savings account rate may be lower than that of a mutual fund, but a secured

savings account ensures that the principal and interest are guaranteed since the risk is lower.

These are known as safe investments.

On choosing which investment to take, you may choose depending on the risk you are willing to

take. It would be better for you to have guaranteed savings account in the meantime since you

are new to these concepts.

Option #6 Take Student Loans

For the student loans, you would borrow $25,000.00 every year for three years with a 3.15%

interest rate to be paid after graduation. For our calculation, it is assumed that the loans are spent

annually for three years after graduating. Interest is calculated by multiplying the principal

amount with the rate and time.

Based on the given data, the amortization of payment is as follows:

For the $75,000.00 loan, it is expected that Simi would pay a total of $79,773.84, which includes

the interest amounting to $4,773.84.

While it is expected that you would earn $40,000.00 with an annual average growth of 4% after

ten years, you should consider the qualitative considerations, such as your willingness to work

after studies, if ever you would choose this option. Education is an investment, and if you do not

see yourself making this career for a long time, this may not be the most viable option so far.

SUMMARY

The following is the summary of all the options and what is the recommended option if both

quantitative and qualitative aspects are considered:

Based on the four work options before tax, the most profitable would be Option #3, wherein you

would work full-time at the Spritzy Gas Station as a bookkeeper. The rationale for the 2-year

calculation was that you needed $75,000.00 for your three remaining years to study, and the first

two years would be sufficient to cover these.

If we were to compute the income after tax, we would get the following amounts:

Even on the after-tax calculations, Option #3 is still the most profitable.

Option #3 is the best option for the qualitative considerations. Option #1 would yield low

income. Options #2 and #4 may become too stressful since you would work two jobs. Moreover,

the Snazzy Simi’s Swirls may require attention since you have several considerations to change,

such as social media concerns, proper accounting records, and profitability analysis. Option #3 is

viable since you already know accounting basics, and learning intermediate concepts such as

depreciation would be easier for you.

As for the mutual fund option or guaranteed savings investment, the choice is up to you. Would

you be willing to accept a higher risk for a higher return? My advice is to take the risk you are

comfortable with.

For the student loan option, I highly advise that you should not consider this for now since you

are still not fully committed to your career after graduation. Use the two years’ time to think if

you would become committed to the job in the future.

I wish you the best in your current and future endeavors.

Sincerely,

Joanna Teresa C Miranda

Consultant