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ACCT351- 1404B-01

Cost Accounting

Executive Summary

Quesadra D. Goodrum

Individual Project Phase 4

Colorado Technical University

Instructor: Jackie Russell

Date: 12/06/2014

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Executive Summary

Products from Goodrum Electronics will be made of high quality threaded metal insert fasteners which are to be used in a myriad of fastening applications for Original Equipment Manufacturers (OMEs) as well as several other companies in the industry. The company will specialize its business on standard and custom produced thread metal inserts for applications such as furnitures, plastic, medical and electronics among others for the high end retail custom and commercial markets. The founders of this company have fast and wide experience in the manufacture and sales management of threaded metal inserts as well as the industry as a whole. The products will be marketed under the auspices of Goodrum Electronics, Inc. which is a holding company which has a combined staff, office space and administration costs. For this particular case the products that will be brought forward as a separate entity.

Having been involved with the manufacture and sale of both standard as well as custom manufactured threaded metals over the years, the business owners thereby saw the need for custom fasteners line with a wide selection of design choices, high end finishes with top notch organization, customer relation and quality. The company’s mission is centred at establishing a well built market standing in the high-end retail, customs and commercial fastenings segments. The business ‘revenue is expected to grow significantly from FY1 to FY2 and by maintaining an average gross margin of above 25%, well it is expected that the business’ net profit will rise to FY3. The capital and expenses to start the business will be provided by the owners, as well as a 3 year commercial loan that will help cater for the expenses.

1.1 Objectives

Company objectives:

· Be the lead in metal inserts and custom threaded fasteners supplier to high-end special order segment in the regional market.

· Gain gross revenue that doubles the earnings of Year1 by the end of Year2.

· Company targets are as follows:

20% of sales in high-end retail customer segment

70% of sales in Custom-range customer segment

10% of sales in commercial development segment

2.1 Start-up Summary

The following outline will be showcasing the overall startup expenses, machine tools, software, stationery and general expenses. The start up capital will be financed by a great margin by Quesadra Goodrum and Roderick Goodrum. Additionally a 3 year commercial loan will be taken to assist in meeting the required cash flow needs.

Products

The following are our chosen products they are all comprised of several main inputs which are as follows:

Threaded inserts

Will suit any insert application. The advantage of insert installation after molding is strength.

Compression Limiters

This will be in the form of non-threaded bushings used in applications. This is done to escape the damages that could be caused to the plastic component by the tightening of the bolt or screw.

Installation Tools and Equipment’s

A myriad of installation methods for the selected inserts currently exists. However, our applications imposed by our engineering team recommend doing installations through custom built systems for the custom fixture.

Products

· Molded-In Inserts Standardized

· Molded-In Inserts w/ Shoulder/Chamfer Standardized

· Molded-In Inserts Studded

· Pressed-In Inserts Standardized

· Bi-Sert Inserts

· Fiber-Sert Inserts

· Intro-Sert Inserts

· Multi-Sert Inserts

· Quick-Sert Inserts

· Sharp-Sert Inserts

· TriSert Inserts

· Zap-Sert Inserts

· Installation Methods & Tools

Market Analysis Summary

Our focus market is that of the organization, construction as well as manufacturing industry, contractors and procurement contractors in the surrounding area that are involved in high end retail. This market shall encompass both custom and commercial development sectors combined.

5.2.1 Sales Forecast

The table below shows the projection for our gross products sales. The projection forecasts our potential for strong sales growth over the duration of the next three years. This includes potential sales due to the expected to be growth of our business in the years to come.

Sales Forecast
	YEAR 1	YEAR 2	YEAR 3
Sales
Combined Product Sales	442000	1000000	1500000
Other	0	0	0
TOTAL SALES	442000	1000000	1500000
Direct Cost of Sales	Year 1	Year 2	Year 3
Cabinets	301600	725000	1087500
Other	0	0	0
Subtotal Direct Cost of Sales	301600	725000	1087500

Market Analysis
		YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5
Potential Customers	Growth						CAGR
High End Retail	3%	5260	5418	5581	5748	5920	3%
Custom Range	5%	3500	3675	3859	4052	4255	5%
Commercial Development	7%	10000	10700	11449	12250	13108	7%
Total	5.55%	18760	19793	20889	22050	23283	5.55%

5.3 Milestones

Outlined in the table are the following important milestones for the program along with dates as well as Official in charge and the respective budget for each. The milestones emphasizes on the planning and implementation for each program.

MILESTONES
Milestone	Start Date	End Date	Budget	Manager	Department
Business Plan	1/16/2014	1/30/2014	2000	Q. Goodrum &R. Goodrum	Marketing
Online Research	1/16/2014	1/20/2014	350	Q. Goodrum	Marketing
Open Accounts with Suppliers	1/16/2014	1/27/2014	350	Q. Goodrum	Web
Product Research	1/16/2014	1/27/2014	500	Q. Goodrum &R. Goodrum	Web
Product Design	1/16/2014	1/30/2014	459	R. Goodrum	Department
Order Sample Products	1/23/2014	2/2/2014	1000	R. Goodrum	Department
Design Sales Literature	1/23/2014	1/30/2014	1000	Q. Goodrum &R. Goodrum	Department
Print Sales Literature	2/2/2014	2/8/2014	300	R. Goodrum	Department
Make Industry Contacts	1/16/2014	3/1/2014	1000	Q. Goodrum &R. Goodrum	Department
Showroom Feasibility Study	1/26/2014	2/1/2014	1000	Q. Goodrum &R. Goodrum	Department
Totals			7959

Management Summary

The president, Quesadra Goodrum, has 20 years of experience in the custom made to order manufacturing field, varying from general contracting, manufacturing management, and having his own manufacturing business. Roderick Goodrum, the Vice President on the other hand has seven years of manufacturing management experience and has spent the past seven years in senior management positions in the hospitality industry. An administration assistant and sales office manager are expected to be recruited as the business grows.

6.1 Personnel Plan

This table outlines business salaries paid in its entirety. The increments of each are maintained to aid in the projection of growth for the business. Plans have been made to hire an administrative assistant to monitor each within the year.

The projections for this year on a monthly increment are as follows:

PERSONNEL PLAN
	YEAR 1	YEAR 2	YEAR 3
Carrolyn Etheridge	24000	38000	45000
Chevern Goodrum	24000	35000	40000
Operators	18000	60000	85000
Administration Assistant	12000	24000	25000
TOTAL PEOPLE	4	6	7
Total Payroll	78000	157000	195000

Financial Plan

Outlined below are the initial financial objectives for the business:

· Obtain an operating line of credit from a financial institution.

· Finance growth through retained earnings.

· Operate on a 25-30% gross margin.

The financial plan for Goodrum Electronics Products is described in the following sections.

7.1 Important Assumptions

The financial plan is dependent on important assumptions which are outlined in the table below as annual assumptions.

Sales Monthly
	Combined Sales	Other
1	0	0
2	0	0
3	20000	0
4	30000	0
5	50000	0
6	40000	0
7	30000	0
8	60000	0
9	70000	0
10	50000	0
11	30000	0
12	20000	0

7.2 Break-even Analysis

After the start-up as well as plant costs are paid off and the business re-stabilizes the monthly operating costs on average are expected to increase slightly and then resettle. The table below indicates that the business would need to sell a minimum of 16 units or 14” standard units and or its equivalent of threaded metal inserts fasteners a month in order to break even.

Manufacturing costs and Costing

Manufacturing costs covering design and engineering activities have decisive effects on total manufacturing costs. These are the following reasons that these were not chosen.

PROCESS AND JOB-ORDER COSTING

Process costing is the most common method used by companies in costing. It is used mostly in mass production environment. Well the process cost system evaluates the net cost of manufacturing process over a specified period of time. Calculation is done for every step to reach at a unit cost average for the whole production process.

The other major costing method is job-order costing. In this method tracking is done on all the costs on an individual product basis. This is applicable to situations where everyunit of production is custom made or few units manufactured. The precise costs incurred in the production of a certain unit are recorded and are not generally averaged with those of any other unit, because each unit may be different. One manufacturer can employ both process as well as job-order costing for different parts of the operations.

ACTIVITY-BASED COSTING

Activity-based costing (ABC) is an additional method to the two traditional costing methods. ABC gathers all the costs related to one manufacturing activity, irrespective of whether these come under the columns of labor or materials or any other thing expensively. Use of this method is sometimes referred to as activity-based cost management (ABCM) or simply activity-based management (ABM).

Activity-Based Costing is mostly appropriate for a company that has a significant amount of overhead pertaining diversity of activities in provision of services or goods to customers with varied demands (Horngren, 2012). The overhead implied can be manufacturing overhead, administrative overhead or the selling expenses. Often within a company customers demand activities that drive up the selling expense, manufacturing overhead and administrative overhead. Therefore, with respect to Activity Based Costing, products and customers responsible for the occurrence of the manufacturing and administrative overheads have to be assigned appropriate costs. Hence, where there are diversity of customers and products, it is not appropriate to allocate the cost of activities to all products and customers based on a single activity like machining hours. The non-machining overheads within the company should be assigned to customers and products that require other activities.

DETERMINING PROFITABILITY THROUGH CVP ANALYSIS

A cost equation merged with revenue equations establishes profitability at varying stages of the value stream. This is known as cost-volume-profit (CVP) analysis. The equations conclude that the net income will equal the total total revenue minus the total cost; the total cost will equal the average variable cost multiplied by the quantity of output plus the fixed cost; and total revenue will equal the price times the quantity of outputs sold. This provides a multi method checks and balance system. Thus in utilizing the cost and revenue equations we can show how the net income equals price time’s quantity of outputs sold minus average variable cost times the quantity of outputs minus all associated fixed costs. That is, where P = price, Q = quantity of output, AVC = average variable cost FC = fixed costs

This is known as the cost-volume-profit equation, and is an extensively-used cost accounting tool. Capital investments represent long-term investments where the assets are involved have useful lives of several years. An appropriate example is building a new production facility and purchasing in machinery and equipment which are capital investments. Capital budgeting is a technique of evaluating the financial feasibility of a capital investment for period of the life of the investment.

A capital budgeting breakdown carries out estimations to examine if the gains, measured in cash inflows, are adequate to repay the business for the cost of the asset and the cost of financing the asset in terms of interest, etc. Capital expenditures are expenditures the business will undertake for future value. These will be incurred when purchasing fixed assets or adding value to the existing fixed assets. The company will use capital budgeting todetermine if a machine is deserves is Acquisition price. The internal Rate of Return can be utilized when the business needs to acquire a new machinery or piece of equipment. For example, a machine which costs $16,980 and provides cash inflow of $3,000 annually for 12 years can have the internal rate of return determined: IRR 14%. This is why we have chosen to use this in retrospect to other costing methods.

References

Horngren, Datar, Foster. (2012). Cost Accounting: A Managerial Emphasis. Upper Saddle River, New Jersey: Peasrson Custom Publishing.

Joe Ben Hoyle and C. J. Skende. Finacial accounting. Vol. 1

Michael Cafferky. Breakeven analysis. The definitive guide to cost volume profit analysis.

Business Expert Press, Aug 11, 2010.

Roman l. Weil, Katherine Schipper and Jennifer Francis. Financial Accounting: An Introduction

to Concepts. November 12, 2012

Percentage Market Share High Range Retail Custom Range Commercial Development 15 10 75