Accounting for decision making - MBA assignment

Table of ContentsTask 1: CVP analysis 1Task 2: Contrasting ABC and traditional costing 5Task 3: Flexible budget and flexible budget performance report 12Task 4: Cash Budget and Control 16References 21

MASTER OF BUSINESS ADMINISTRATION INTERNATIONAL PROGRAM ASSIGNMENT ACCOUNTING FOR DECISION MAKING Submitted to: Dr Pham Thi Ngoc Bich Submitted by: ID No.: Class: MBAOUM… Ho Chi Minh City, October 2013 i Table of Contents Task 1: CVP analysis Task 2: Contrasting ABC and traditional costing Task 3: Flexible budget and flexible budget performance report 12 Task 4: Cash Budget and Control 16 References 21 ii Task 1: CVP analysis: Summarize information: Sales price per pair of sandals (units) $40 Variable costs per pair of sandals (units) $25 Fixed costs per year Building rental $15,000 Equipment depreciation $7,000 Selling $20,000 Administrative $18,000 Total fixed costs $60,000 1) Break-even in units and sales dollars: - Break-even in units = = - $ $ Break-even sales dollars = , $ = 4,000 pairs = Whereas:  CM ratio =  Contribution margin per unit (UCM) = Price – Variable cost per unit = $40 - $25 = $15  CM ratio = $ $ = 0.375 or 37.5%  Break-even sales dollars = $ , = $160,000 2) Angie has decided that she must earn at least $15,000 in the first year to justify her time and effort: => The number of units to earn target income = = = $ , $ $ , = 5,000 pairs 3) Angie now has two salespersons working in store – one full time and one part time It will cost her an additional $8,000 per year to convert the part-time position to a fulltime position Angie believes that the change would bring in an additional $25,000 in sales each year - Additional sales = $25,000 - Additional fixed costs = $8,000 - Additional CM = Additional sales x CM Ratio = $25,000 x 0.375 = $9,375 - Additional Net Income = Additional CM – Additional fixed costs = $9,375 - $8,000 = $1,375 (positive)  Therefore, she would convert the part-time position to a full-time position 4) Refer to the original data and ignore the proposition in question c During the first year, the store sold only 5,000 pairs of sandals a) Prepare the income statement in a contribution format for the Sandal Shop’s first year: Sales (= 5,000 x $40) $ 200,000 Less: Variable costs (= 5,000 x $25) $ 125,000 Contribution margin $ $ Operating income 60,000 $ Less: Fixed costs 75,000 15,000 b) Angie is confident that with a more intense sales effort and with a more creative advertising she can increase sales by 20% next year: Degree of operating leverage (DOL) = = $ $ , , = times Percentage change in operating income = DOL x Percent change in sales = x 20% = 100% 5) “CVP” analysis is a useful planning tool because it is so accurate” In my opinion, CVP is useful but it does not base on its accurate because it depends on forecasts, assumption and estimates For example, it is assumed that fixed costs are constant, and that both the variable cost and the revenue curves are linear over the relevant volume of output In reality, fixed costs may not remain constant over the entire output range considered in the analysis, that being particularly true if the volume range considered is quite wide Fixed costs may indeed be constant over a band of output, but then will increase sharply and remain constant for another stage To retain the usefulness of CVP analysis, it is necessary to limit the volume range to be examined so that the behavior of both fixed and variable costs may be more accurately determined The basic assumption that CVP is a linear relationship is realistic only over narrow ranges of output which is called the relevant range However, the real usefulness of CVP is that it enriches the understanding of the relationship between costs, volume and prices as factors affecting profit, enabling management to make assumptions which will help the decision-making process in the short-run planning period Usefulness of CVP analysis is not based on its “accuracy” The calculation is valid as long as those assumptions hold true CVP analysis can be useful to help answer queries such as: - How many units need to be sold or services performed to break even? - What is the impact of a change in the mix between fixed and variable costs? - How many units need to be sold or services performed to achieve a particular level of profit? - Which products or services are contributing best to the profit performance? Etc., Therefore, CVP analysis is an important tool in planning and decision making but it is not so accurate Task 2: Contrasting ABC and traditional costing: Summarize information with calculation in which is appropriated: Unit cost and revenue Standard Briefcases Selling price per unit Specialty Briefcases $ 36 35 Unit product cost Gross margin per unit $ 40 25 $ $ 15 Manufacturing cost Units produce each month Direct materials: 10,000 Leather $ 15.00 2,500 $ 7.50 Fabric 5.00 5.00 Synthetic - 5.00 Total Direct materials Direct labor (0.5 DLH and 0.25DLH @ $12 per DLH) Manufacturing overhead (0.5DLH and 0.25 DLH @ $18 per DLH) $ 20.00 $ 17.50 6.00 3.00 9.00 4.50 Total cost per unit $ 35.00 Manufacturing overhead $ 101,250 Direct labor hours Predetermined overhead rate $ 25.00 DLHs 5,625 $ 18 Standard Briefcases a Produced in batches of No of Setups Times for setups b Times for inspection/month c Machine times units 200 hrs hrs hrs 50 300 0.5 Specialty Briefcases units 25 hrs hrs hrs 100 500 d Activity cost pools Purchasing Material handling Production orders and setup Inspection Frame assembly Activity measures No of orders No of receipts Setup hours Inspection hours Assembly hours Machine related Machine hours Estimated overhead costs 12,000 15,000 20,250 16,000 8,000 30,000 $101,250 Expected Activity Activity Measure No of orders: Leather Fabric Synthetic No of receipts Leather Fabric Synthetic Setup hours (=Time for setups x no of setups) * Inspection hours (=Time for inspection/month) ** Assembly hours Machine hours (=Machine time x units produced per month) *** Standard Briefcases 82 34 48 116 52 64 - Special Briefcases 118 12 100 184 16 160 Total 200 40 60 100 300 60 80 160 50 200 250 300 800 500 800 800 1,600 5,000 5,000 10,000 (*) Setup hours = Time for setups x number of setups Therefore, we have: - Setup hours for Briefcase = x 50 = 50 hours - Setup hours for specialty Briefcase = x 100 = 200 hours (**) Inspection hours are equal to Time for inspection per month given in part b (***) Machine hours = Machine time x units produced per month  Machine hours for Briefcase = 0.5 x 10,000 = 5,000 hours Machine hours for Briefcase = x 2,500 = 5,000 hours 1) Using ABC, determine the amount of manufacturing overhead cost that could be allocated to each standard briefcase and each specialty briefcase: St B: Standard Briefcases Sp B: Specialty Briefcases AR: Activity Rate - Activity Rate = For example, Activity rate for purchasing = , = 60 Similar calculation method for each of Activity costs pools to find out AR - Consumption Ratio for purchasing = = = 0.41 or 41% Similar calculation for the rest to find out Consumption ratio for each activity cost pools - Overhead allocated for each kind of Briefcases = Cost Driver for each kind of Briefcases x AR (which is based on each activity pools) - Overhead per unit = Total overhead costs Number of units Consumption Ratio Cost Driver Activity cost pools Purchasing Material handling Production orders and setup Inspection Frame assembly Machine related Total overhead costs Number of units Overhead per unit Overhead Activity Cost measures No of 12,000 orders No of 15,000 receipts 20,250 16,000 8,000 30,000 $101,250 Setup hours Inspection hours Assembly hours Machine hours St B Sp B Overhead Allocated St B Sp B Total AR St B Sp B 82 118 200 60 0.41 0.59 4,920 7,080 116 184 300 50 0.39 0.61 5,800 9,200 50 200 250 81 0.20 0.80 4,050 16,200 300 500 800 20 0.38 0.63 6,000 10,000 800 800 1,600 0.50 0.50 4,000 4,000 5,000 5,000 10,000 0.50 0.50 15,000 15,000 $39,770 $61,480 10,000 2,500 $3.98 $24.59 2) Determine the unit product cost of each product line from the perspective of the ABC system: Standard Briefcases Specialty Briefcases Units produce each month Direct materials: 10,000 2,500 - Leather 15.00 7.50 - Fabric 5.00 5.00 - Synthetic 5.00 Total Direct materials Direct labor (0.5 DLH and 0.25DLH @ $12 per DLH) $ 20.00 $ 17.50 6.00 3.00 Manufacturing overhead* 3.98 24.59 Total cost per unit $ 29.98 $ 45.09 (*) Manufacturing overhead is taken from calculation in part 3) Within the limitations of the data that have been provided Evaluate the president’s concern about the profitability of the two product lines Write a brief memo to the president giving your opinion about the president’s decision on shifting the company’s resources entirely to production of specialty briefcases and providing the arguments for your opinion From using ABC system to determine the unit product cost of each product line, we have the information that costs for producing Special Briefcase is so high compare to the previous breakdown To manufacture each Special Briefcases, it costs for $45.09 instead of $25.00, while the standard briefcase cost $29.98, instead of $35 We estimate gross margin for specialty briefcases and for standard briefcases as the following: Unit cost and revenue Standard Briefcases Selling price per unit Unit product cost Gross margin per unit $ 36 29.98 $ 6.02 Specialty Briefcases $ 40 45.09 $ (5.09) Therefore, the view of president was wrong when he said that the company can get $15 per unit on special briefcases We can write a brief memo to the president as the following: Respected sir, As you can see estimating from ABC method to allocate the overhead cost to each product line, I recognize that producing specialty briefcase is very costly Manufacturing overhead cost of producing special briefcases is $45.09 which is higher than $20 compare to $25 as given breakdown, while producing standard briefcases bring us back $6.02 gross margin per unit instead of $1 Therefore, the ideal of focusing on expanding producing specialty and decision on shifting the company’s resources entirely to production of specialty briefcases is inefficiency and unprofitable So, we consider on whether the company should continue or stop expanding producing specialty briefcase? I am looking forward to have further discussion with you on this matter for our best solution With Best Regards, 10 4) Sally Henrie stated that “the completion hasn’t been able to touch our price” on special business I think there may have some arguments on this statement If company would consider producing product line of specialty briefcases, the selling price must cover at least the unit product cost which is cost $45.09 Therefore, the price of specialty briefcases must be from $45.09 (at break-even point) or above $45.09 (if add together with expected profits) In reality, the price depending on many indicators that make the company can set up their price to suit with price setting objectives Since the competitor charged over $50 a unit for its special items, means they may be able to touch the company’s price and become very competitive price as well, if company set up price to consider profits matter The answer to question about the price needs to assess their ultimate profitability At present, company overlooks the higher reaches of their pricing potential Basing release prices on realistic market research and cost analysis can give managers the confidence to carry out their price In this case, we not have enough information to make conclusion on whether competitor can touch the company’s price or not since we not have the actual price compare to the market price However, the statement of Sally should be review based on their actual cost of producing and contribution margin of specialty product line 11 Task 3: Flexible budget and flexible budget performance report: Summarize information: Sales Cost of goods sold: - Direct materials - Direct labor - Machinery repair (Variable cost) - Depreciation - Machinery - Utilities (25% is variable cost) - Plant manager salaries Gross profit Selling expenses: - Packaging - Shipping - Sales salary (fixed annual amount) General and administrative expenses: - Advertising - Salaries $ 3,000,000 $ $ 2,107,000 893,000 $ 356,000 1,200,000 260,000 57,000 250,000 200,000 140,000 80,000 116,000 160,000 81,000 241,000 - Entertainment expenses 90,000 $ 412,000 Net income $ 125,000 We calculate cost per unit for each of cost category base on 20,000 units as the following: 20,000 150 60 13 2.85 250,000 50,000 Volume Selling price = Sale/ volume = $3,000,000/ 20,000 = DM per unit = Total DM/ volume = $1,200,000/ 20,000 = DL per unit = Total DL/ volume = $260,000/ 20,000 = Machinery repair per unit = Machinery repair/volume = $57,000/ 20,000 = Depreciation (fixed costs) = Utilities Variables = 25% x $200,000 = $ $ $ $ $ $ Utilities Fixed = $200,000 – $50,000 = $ 150,000 Utilities variable per unit = $50,000/20,000 = Packaging per unit = $80,000/ 20,000 = Shipping per unit = $116,000/ 20,000 = Sales salary fixed (fixed costs annual) = $ 2.50 $ 4.00 $ 5.80 $ 160,000 12 a) Prepare flexible budgets for the company at sales volume of 18,000 and 24,000 units: Volume Sales Cost of goods sold Direct materials Direct labor Machinery repair (Variable cost) Depreciation Machinery Utilities (25% is variable cost) Plant manager salaries Gross profit Selling expenses Packaging Shipping Sales salary (fixed annual amount) General and administrative expense Advertising Salaries Entertainment expenses Net income 18,000 20,000 24,000 $2,700,000 $ 3,000,000 $ 3,600,000 $1,950,300 $2,107,000 $ 2,420,400 1,080,000 234,000 1,200,000 260,000 1,440,000 312,000 51,300 57,000 68,400 250,000 250,000 250,000 195,000 200,000 210,000 140,000 140,000 140,000 $749,700 $336,400 $893,000 $356,000 $ 1,179,600 $ 395,200 72,000 104,400 80,000 116,000 96,000 139,200 160,000 160,000 160,000 $412,000 $ 412,000 $ 412,000 81,000 241,000 81,000 241,000 81,000 241,000 90,000 90,000 90,000 $ 1,300 $ 125,000 $ 372,400 13 b) b1- Prepare a flexible budget performance report for 2012 [@ Selling Price is $150]: Volume Sales Cost of goods sold Direct materials Direct labor Machinery repair (Variable cost) Depreciation Machinery Utilities (25% is variable cost) Plant manager salaries Gross profit Selling expenses Packaging Shipping Sales salary (fixed annual amount) General and administrative expense Advertising Salaries Entertainment expenses Net income Budget @ 20,000 units 20,000 $150 $3,000,000 Budget @ 24,320 units 24,320 $150 $3,648,000 Actual 24,320 $ 150 $3,648,000 $2,107,000 $2,445,472 $2,443,000 Variances (59,200) F 43,840 U 1,200,000 260,000 1,459,200 316,160 1,400,000 360,000 57,000 69,312 60,000 (9,312) 250,000 250,000 250,000 - 200,000 210,800 218,000 7,200 140,000 140,000 155,000 15,000 $ 893,000 $ 356,000 $1,202,528 $ 398,336 F U U $1,205,000 $ 376,000 80,000 116,000 97,280 141,056 90,000 124,000 (7,280) (17,056) 160,000 160,000 162,000 F F 2,000 U $ 412,000 $ 412,000 $436,000 81,000 241,000 81,000 241,000 104,000 232,000 23,000 (9,000) 90,000 90,000 100,000 10,000 $ 125,000 $392,192 $393,000 $880 14 U F U F b2- Analyze and interpret the direct materials variance and direct labor variance: As can be seen from Flexible budget performance report in Part b1, the company has used less direct materials in actual production process compare to budget about $59,200 while they did spent more on direct labor which is higher than budget around $43,840 However, the differences between saving and overused is $15,360 (=$59,200 - $43,840) The company still has saved of $15,360 in limited comparison of two factors direct materials and direct labor This means that company has adjusted the direct input factor from the direct materials, in which they totally can manage well their production costs from direct input factor and it is in their hand capacity Furthermore, direct labor cost account for a proportion of 57.31% (=$1,400,000/$2,443,000) while direct hour labor occupy about 14.74% (=360,000//$2,443,000) in total costs of goods sold Therefore, percentage of variance in direct materials has more effect to total cost of goods sold compare to percentage change in direct labor cost So, the production manager has most responsibility on how well of using direct materials and direct labor 15 Task 4: Cash Budget and Control: Summarize information: Actual and projected sales: Units Dollars January (actual) 18,000 $396,000 February (actual) 22,500 $495,000 March (budgeted) 19,000 $418,000 April (budgeted) 18,750 $412,500 May (budgeted) 21,000 $462,000 - 40% of credit sales is collected in the month of sale - 35% is collected after the sale - 23% is collected in the second month after the sale - 2% is uncollectable a) Prepare a schedule of cash collection: January February March April May Total Cash 396,000 495,000 418,000 412,500 462,000 - Cash sales - - - - - - Credit sales 396,000 495,000 418,000 412,500 462,000 158,400 138,600 91,080 198,000 173,250 113,850 167,200 146,300 96,140 165,000 144,375 Cash collection from: - January's Sales - February's Sales - March's Sales - April's Sales - May's Sales Total cash collection 184,800 $158,400 $336,600 $431,530 $ 425,150 $ 425,315 16 Description: Cash collection in January = 40% x $396,000 = $158,000 Cash collection in February = 35% x $396,000 + 40% x $495,000 = $138,600 + $198,000 = $336,000 Cash collection in March = 23% x $396,000 + 35% x $495,000 + 40% x $418,000 = $91,080 + $173,250 + $167,200 = $431,530 Cash collection in April = 23% x $495,000 + 35% x $418,000 + 40% x $412,500 = $113,850 + $146,300 + $165,000 = $425,150 Cash collection in May = 23% x $418,000 + 35% x $412,500 + $ 40% x $462,000 = $96,140 + $144,375 + $184,800 = $425,315 b) Prepare a merchandise purchases budget for February, March and April Report calculations on units and then show the dollar amount of purchases of each month - Ending monthly inventory = 20% next month's unit sales + 100 units safety stock For example:  February’s desired ending inventory = 20% x 19,000 + 100 = 3,900 units  February’s beginning inventory = January’s ending inventory Similar calculation for March and April’s ending inventory and the beginning inventory of this month is equal to ending inventory of previous month - 31 January and 28 February: actual inventory are consistent 17 Merchandise purchases budget for February, March and April: January February March April Products needs 18,000 22,500 19,000 18,750 Desired ending inventory 4,600 3,900 3,850 4,300 Safety stock 100 100 100 100 Total needs 22,600 26,400 22,850 23,050 Less beginning inventory 4,600 3,900 3,850 Products need to purchase 21,800 18,950 19,200 $ 12 $ 12 $ 12 $ 261,600 $ 227,400 $ 230,400 Cost per unit Total purchase costs c) Prepare a schedule of cash payments on product purchases for March and April - 30% of purchase made in the month is paid in that month; - 70% other is paid in paid in the next month Therefore, Cash payment for: - February = 30% x $261,600 = $78,000 - March = 70% x $261,600 + 30% x $227,400 = $183,120 + $68,220 = $251,340 - April = 70% x $227,400 + 30% x $230,400 = $159,180 + $69,120 = $228,300 18 Schedule of cash payment on products purchases for March and April: February Total purchase costs March April $ 261,600 $ 227,400 $ 230,400 78,480 May 183,120 Cash payment for: - February - March 68,220 - April Total cash payment 159,180 69,120 $ 78,480 $ 251,340 161,280 $ 228,300 d) Prepare cash budget for March and April, including any loan activity and interest expense Compute the loan balance at the end of each month Based on the following given information to prepare the cash budget for March and April: - Minimum cash balance for the month-end is $50,000, is maintained by borrowing cash from the bank - If the balance is exceeded $50,000, repay the loan as much as it can without going below the balance the minimum, interest rate annually is 12% - At Feb 28th, the balance loan is $12,000, cash balance is $50,000 19 Cash budget for March and April: March April $ 50,000 $ 58,070 431,530 425,150 Cash available: = (1) + (2) $ 481,530 $ 483,220 Cash payment for: $ 411,340 $ 388,300 - Products purchase 251,340 228,300 - Selling and Admin Expenses (=$1.920.000/12 months) 160,000 160,000 Different between cash available and cash payment = (3) - (4) $ 70,190 $ 94,920 12,000 - 120 - $ 58,070 $ 94,920 Beginning cash balance Cash receipt from: - Sales - Disposal value of old equipment Financing Repayment of debt ($12,000) (12% interest rate annual/12 months x $12,000) Ending cash balance e) Refer to the results in part d, since we get the balance exceeds $50,000 ($58,070) the company may not need to borrow money from the bank if not necessary It met two requirements of the firm - Firstly, the firm’s minimum cash balance for the month-end is $50,000 and maintained in the following month - Secondly, the company has repaid the loan and interest which carries 12%/ month but still firm got the end balance was $58,070 Therefore, if it would not necessary then the firm no need to borrow additional funds at the end of March 20 References Mckinsey&Company (2013) Insights & Publications Retrieved from http://www.mckinsey.com/insights/marketing_sales/pricing_new_products Mowen/ Hansen/ Heitger (2009) Cornerstones of Managerial Accounting (3rd Edition) International Student edition, South – Western, CENGAGE Learning China Translation & Printing Services Limited Pham Thi Ngoc Bich (2013) Accounting for Decision Making [PowerPoint Slides Syllabus] Tax accountants (2013) Cost-volume-profit Analysis: Some Limitations Retrieved from http://www.tax-accountants.co.uk/costvolumeprofit-analysis/costvolumeprofitanalysis-some-limitations.php 21 ... flexible budget performance report: Summarize information: Sales Cost of goods sold: - Direct materials - Direct labor - Machinery repair (Variable cost) - Depreciation - Machinery - Utilities (25%... 462,000 - Cash sales - - - - - - Credit sales 396,000 495,000 418,000 412,500 462,000 158,400 138,600 91,080 198,000 173,250 113,850 167,200 146,300 96,140 165,000 144,375 Cash collection from: - January''s... number of setups Therefore, we have: - Setup hours for Briefcase = x 50 = 50 hours - Setup hours for specialty Briefcase = x 100 = 200 hours (**) Inspection hours are equal to Time for inspection per