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UnitVII.docx1
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Unit VII Final Project:
Michell Muldrow
Columbia Southern University
ACC 5301 Management Applications of Accounting
Dr. Renee Norris-Jones
June 14, 2022
Abstract
This report has used various management accounting tools to help the management of the Cookie business to make managerial decisions. The report has provided the contribution margin and break-even analysis to help the company managers assess the contribution of each of the three products produced by the Cookie business. Besides, the absorption and marginal costing methods have been used to determine the value of the closing inventory. To help managers of the company decide if they will take a particular order from the customer, the results of such a proposal have been presented to help managers make decisions. Additionally, the report includes the IRR, cash budget, and variance analysis technique to assist the managers of the Cookie business manager with the various managerial decisions.
Unit VII Final Project
Introduction
Management accounting provides various tools to help the manager to make decisions. The business's success depends on how the organization uses its resources to generate revenue and profits (Schuster et al., 2021). At the core of this mandate and objective of the organization are the managers who must make day-to-day decisions. This report employs various accounting tools to help the Cookie business managers make managerial decisions. The essential management tools discussed in this report include the contribution margin and break-even analysis, absorption and variable costing techniques, special order analysis, the IRR investment technique, cash budget, and variance analysis.
Part 1 Contribution Margin/Breakeven
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Chocolate Chip |
Sugar |
Specialty |
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Per item Contribution Margin |
0.79 |
0.69 |
3.23 |
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Weighted Average Contribution Margin |
1.02 |
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Break-even point in units |
122,783 |
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Contribution margin analysis is critical in determining how products contribute to the one company's overall profitability represents. The contribution margin is obtained by subtracting the variable cost of production from the total revenue (LABA, 2022). This analysis is critical for the management in deciding which product to produce and which should not be produced. Of the three products produced by the Cookie business, Specialty product contributes highly to the overall profits of the company than the rest of the products. Sugar product is the lowest contributor to the profitability of the company. On the other hand, the Cookie business needs to produce 122,783 units of the three products to remain in operation. Break-even units represent the number of units when the profit is zero.
Part 2 Full and Variable Costing
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Full (absorption) costing : |
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Full cost per unit |
$ 2.05 |
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Ending Inventory Full (absorption) costing |
$ 369,000 |
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Variable costing : |
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Variable cost per unit |
$ 2.00 |
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Ending Inventory Variable costing |
$ 360,000 |
Absorption costing is the method of determining the overall cost of production. It considers the variable and fixed costs of production (Schuster et al., 2021). From the above analysis, the total cost of production is $ 2.05 resulting in the high cost of ending inventory. Absorption costing does not provide a practical analysis of the contribution of each product to the profitability of the company. On the other hand, variable costing or marginal costing is the most efficient method of determining the cost of the product and its contribution to the organization's overall profitability. The variable cost of production is $ 2 resulting in the closing stock value of $ 360,000.
Part 3 Special Order
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Revenue for special order |
$ 2,750 |
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Costs for special order: |
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Design cost |
$ 500 |
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Tool cost |
$ 100 |
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Net increase (decrease) in profit |
$ 2,150 |
Special order involves assessing whether to accept the unusual customer. Before a special order is accepted, the managers must assess if the order will be profitable to the organization. The managers should accept the order from the Cookie business special order because it will be profitable.
Part 4 Internal Rate of Return
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Calculate the Internal Rate of Return: |
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PV of annuity factor |
5.2064 |
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Internal rate of return |
8% |
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Accept or reject |
Reject |
The internal rate of return is the rate when the project's net present value is Zero. In other words, it's the rate when the present value of the project cash inflows is equal to the present value of the cash outflows. IRR is an essential investment technique used to determine the profitability of investment by comparing the calculated rate with the firm’s cost of capital (Hazen & Magni, 2021); the IRR of Cookies Business is 8%, while the firm's firm's required rate of return is 9%. According to the IRR technique, if the firm's required rate of return is lower than the IRR, the project should be rejected. As such, the management of Cookie's business should reject purchasing the new equipment because the IRR is less than the firm's required return.
Part 5 Cash Budget
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Estimated cash receipts |
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January |
February |
March |
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Last month's sales |
$ 50,000 |
$ 25,000 |
$ 60,000 |
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Current month's sales |
$ 100,000 |
$ 240,000 |
$ 72,000 |
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Total |
$ 150,000 |
$ 265,000 |
$ 132,000 |
A cash budget is essential in determining the cash requirements of the company. Based on the Cookie business credit trading arrangement, 80% of the credit sales are paid in the month of sale, while 20% is paid in the following month. Thus Cookie cash receipt for each month will constitute 20% from the previous month and 80% paid off the month of sale.
Part 6 Material and Labor Variance
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Amount |
Favorable/ Unfavorable |
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Calculate Materials Variances: |
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Materials Price Variance |
$ (7,452) |
Unfavorable |
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Materials Quantity Variance |
$ (7,252) |
Favorable |
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Calculate Labor Variances: |
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Labor Rate Variance |
$ 22.5 |
Unfavorable |
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Labor Efficiency Variance |
$ (75) |
unfavorable |
Variance analysis is an essential control tool as it involves comparing the actual performance and the budget. The difference between actual cost costs for materials procured and the standard cost is the price variance (Maheshwari et al., 2021). It is the variation between the standard cost of direct materials that are stipulated for the output that has been attained and the exact cost of direct materials used. The material price variance of the Cookie business is unfavorable because the actual cost is higher than the standard cost. Labor variance is used to assess the actual labor cost and the budgeted cost. If the actual labor cost is higher than the standard labor cost, it indicates inefficiency in the organization, as seen from Cookie's business labor efficiency variance.
Conclusions and Recommendations
The contribution margin analysis of the three products produced by the Cookie business shows a positive contribution. However, the specialty product contributes highly to the company's profitability; therefore, the company should produce more Specialty products to increase the overall profits. Similarly, the proposed purchase of equipment should not be implemented because the IRR is less than the required return. The cookie business should also control its material cost to reduce the variance in the procurement and use of the material and increase productivity.
References
Hazen, G., & Magni, C. A. (2021). Average internal rate of return for risky projects. The Engineering Economist, 66(2), 90-120.
LABA, D. P. (2022). COST-VOLUME-PROFIT ANALYSIS. AKUNTANSI MANAJEMEN, 26.
Maheshwari, S. N., Maheshwari, S. K., & Maheshwari, M. S. K. (2021). Principles of Management Accounting. Sultan Chand & Sons.
Schuster, P., Heinemann, M., & Cleary, P. (2021). Introduction to Management Accounting. In Management Accounting (pp. 1-16). Springer, Cham.
https://link.springer.com/chapter/10.1007/978-3-030-62022-6_1
