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Classifying a company’s costs allows for an in-depth analysis of the impact that changes in output have on revenues, costs, and net income or net loss. A costvolume-profit (CVP) analysis will be completed in order to determine the breakeven point. Relevant costs will be used to prepare a flexible budget. Additionally,an appropriate costing system should be selected and the choice should be substantiated with reasonable rationale. Finally, a memo should be prepared formanagement that summarizes the results of the quantitative analysis and makes recommendations for an optimal costing system to be ethically used by key decision makers.


The project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones will be submitted in Modules Two, Four, and Five. The quantitative analysis with a memo to management will be submitted in Module Seven.
In this assignment, you will demonstrate your mastery of the following course outcomes:
Utilize cost behavior and cost analysis to assist decision makers in planning and adding value to the business
Prepare a flexible budget for supporting informed managerial decision making
Interpret variances for determining the optimal costing system to fit an organization’s internal accounting needs
Interpret the role of ethics in cost accounting for determining its impact on decision making.

Cost Classification for Product and Period Cost

Product and period cost is a way to classify the cost to get the accurate result of production cost. For analyzing the product and period cost of the question, it has been analyzed that whether the given cost are related to manufacturing the product or this cost are situated with the office and administration operations of the company. For analyzing it in a better way the direct link and indirect link of cost with manufacturing plant has been investigated.

It has been found that for determining the product cost, various classification of cost could be done such as direct material, manufacturing overhead, direct labor etc. For understanding these costs, an individual or an accountant must be directly associated with the product so that every cost could be assigned to the particular product. It is also true that the direct material and labor means a material bought by the company for its production and for transforming the raw material into finished goods. Direct labor includes the cost of total labor and amount paid to them per hour whereas indirect materials are those material which do not have a direct connection with a production and manufacturing of a product.

It has been found that in given question the product cost is material-cedar, material-plastic, factory worker labor, indirect material, shipping, factory depreciation, factory utilities and factory repairs and maintenance and periodic cost is office rent, advertising, liability insurance, office salaries, office depreciation etc (Stratton, SAS Institute Inc, 2009).

Cost volume profit analysis:

Cost volume profit analysis is an essential tool in costing system to make the determination about an organization for making some changes in the product line. It could be sued to determine the changes effects in the product price and changes in product cost. This analysis could be used to determine the fixed and variable cost in a particular period.

Implication:

Through the above calculations, it is suggested to that company should at least produce 33272 units to reach the breakeven point. At this point, company need not to bear any expenses.

Contribution margin and contribution margin ratio:

Contribution margin of the company has been calculated in the worksheet and in cell 20 and j20 (budgeted and actual respectively) and the contribution ratio has been computed in Part 1 sheet, cell g21 and cell J21 (budgeted and actual respectively) and are significantly associated with the production cost which does not include fixed cost. The contribution margin which has been measured does not include the fixed cost amount.

Breakeven quantity and breakeven revenue:

Breakeven quantity and revenue has been measured in the given question. Breakeven is the point where the cost and revenue of the company is similar. At this point, the company does not suffer with nay loss. The Breakeven Quantity in the given questions is 33272 units and the Breakeven Revenue is $ 698712.

Determination:

If the company is reaching at breakeven point than company could plan for enhancing the sales as the additional cost is less and the fixed cost could be covered with high sales. So if company is achieving the break even analysis than company must go for enhancing the sales.

Cost Volume Profit Analysis

a)

Fixed cost and their segregation:

Fixed costs are those cost which do not change with the changes in the production level. Fixed cost determination is quite important in a manufacturing plant to analyze the cost structure of the company and analyze that whether the variable cost of the company is higher or lower than the fixed cost.

In the given question, the Factory Depreciation Factory Utilities, Factory Maintenance and Repairs, Office Rent, Advertising, Liability Insurance, Office Depreciation and Office Salaries are the fixed cost of the company. These costs would always occur in the company whether company manufacture something or not (Snyder and Davenport, 2013).

Variable cost:

Variable costs are those cost which get changes with the change in production level. If the production gets 0, then the variable cost would be 0 and with the increment in production level, the variable cost would be enhanced.

In the given question it has been found that the total variable cost of the company is $15.56 per unit (Weygandt, Kimmel & Kieso, 2015). It has been found through this calculation that the variable cost get fluctuate with the production level.

Budget Model:

Budget model is the proposal and allocation of funding level according to the historical data. Budget model is prepared by the company to forecast all the future expenses and income of the organization. This model helps the administration of the company to make better decisions about the product line and production house of the company.

In this model, the future estimation of cost and revenue is done by the cost accountant of an organization. Budget model given in the workbook depict that the almost all the expense and revenue of the company in unfavorable. The forecasting done by the cost accountant of the company is not up to date. This could be happened due to market fluctuations or some other factors of the company.

Actual Activity Measure:

Actual activity measurement of the company depict bout the actual and flexible budget of an organization. It shows that how much variance have been faced by the company due to budget and actual figures.

Flexible budget calculations:

Flexible budget calculation depict about all the budget and actual budget. The calculations have been done in the workbook.   

Variances:

Variances are the factors which depict the total difference of accounting figures in actual and budgeted reports.  The calculations have been done in the workbook.   

Budgeting process aspects:

Through analyzing the budgeting process of the organization, it has been identified that the budgeting process of the company is quite attractive, if company focus on some aspects than it could be more attractive (Garrison et al, 2012). Some of the aspects are as follows:

  1. Better analysis of market
  2. A depth study about material price
  3. Labor must be hired according to market rate
  4. Political factors must be considered
  5. Satisficing strategy must be approached.

Budget variance:

The budget variance of the company depict that the process of budgeting is not so great of the company. The variances depict that many factors are not considered by the company while preparing the budget (Hoque, 2002). Variance analysis depict that all the variances of the company is unfavorable that Means Company has paid extra amount to material, labor and factory cost.

Contribution Margin and Contribution Margin Ratio

All the variances must be investigated to analyze whether the company is performing a great work or company is lacking somewhere. Variance analysis helps the company to reduce the cost and better analyze the situation of the company and market. It also helps the company to investigate better in competitive way.

Cost allocation system:

Through analyzing the current allocation system of the company, it is recommended to the company to switch to activity based costing. As the traditional costing system of the company does not offer an accurate result to the company due to the fact that depth information are not considered by traditional costing system. So company must go for activity based costing, this would offer accurate result to the company (Hansen, Mowen and Guan, 2007). 

Cost allocation system of a company must be in such a condition that the depth information is used by the technique and provide the best of the information to the organization and administration so that the cost could be allotted in a right manner to the products and best decisions could be made by the administration.

Meet the goals:

As discussed above, the activity based costing allocation method helps the management of the company the most as this method offers the curate result to meet the goals of the company. Through this system company get to know that what changes must be done to achieve the goals of the company. This offers the best figures to the company to make a great plan and control accordingly over the organizational planning of the company and cost reduction goal of the company.

So that it could be said that activity based costing is the beast technique for the company to apply in the costing system of the company and make better decisions about allocating the cost to each cost center.

Ethical implication:

While choosing the best costing system, many aspects and ethical implications must be considered by the company. This ethical consideration helps the company in doing the cost allocation in the best manner. So that the planning and controlling of the company could be done in a better way and company could achieve the goals ethically. Following are the ethical implication that must be considered by the organization:

  1. Better knowledge about the costing system
  2. Must compare the costing system and choose the best one
  3. Market must be competitive or it must be on cost plus basis
  4. Allocation method must be equitable (Bromwich and Bhimani, 2005)

So through analyzing it, it could be said that activity based costing is the beast technique for the company to apply in the costing system of the company and make better decisions about allocating the cost to each cost center.

Ethical implication of direct and indirect cost:

Direct costs are those cost which is directly linked with the production of the company whereas indirect costs are those cost which is not directly linked with the production of a company. Direct cost must be analyzed properly before allocating it to the cost center or products of an organization (Davies and Crawford, 2011). Indirect cost must be analyzed properly before allocating it to the cost center or products of an organization.

While choosing the one of the direct or indirect cost, organization must consider many aspects such as is the cost directly linked with the production or have some indirect connection with the production. The implication of direct or indirect cost must be done very properly as this could manipulate the result of the company and could affect the planning and controlling of the organization.

Improvements:

Through analyzing the all quantitative aspect of the given case, it has been found that the company is facing many issues. The fixed cost of the company is quite higher than the variable cost of the company. All the variances must be investigated to analyze whether the company is performing a great work or company is lacking somewhere.

Variance analysis depict that all the variances of the company is unfavorable that Means Company has paid extra amount to material, labor and factory cost. All the variances must be investigated to analyze whether the company is performing a great work or company is lacking somewhere.

Company must suggested  to choose the costing method after analyzing all the aspects carefully and the direct cost and indirect cost must also be investigated very well by the company before implementing it in the company.

Improvement and recommendation:

Variance analysis depict that all the variances of the company is unfavorable that Means Company has paid extra amount to material, labor and factory cost. All the variances must be investigated to analyze whether the company is performing a great work or company is lacking somewhere. Variance analysis helps the company to reduce the cost and better analyze the situation of the company and market. It also helps the company to investigate better in competitive way.

Through analyzing the all quantitative aspect of the given case, it has been found that the company is facing many issues. The fixed cost of the company is quite higher than the variable cost of the company. All the variances must be investigated to analyze whether the company is performing a great work or company is lacking somewhere.

Through analyzing the current allocation system of the company, company must switch to activity based costing. As the traditional costing system of the company does not offer an accurate result to the company due to the fact that depth information are not considered by traditional costing system (Student Workbook). Company must recommended to choose the costing method after analyzing all the aspects carefully and the direct cost and indirect cost must also be investigated very well by the company before implementing it in the company.

References:

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.

Stratton, A.J., SAS Institute Inc., (2009). Systems and methods for costing reciprocal relationships. U.S. Patent 7,634,431.

Snyder, H. and Davenport, E., (2013). What does it really cost? Allocating indirect costs. Asian Libraries.

Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793.

Bromwich, M. and Bhimani, A., (2005). Management accounting: Pathways to progress. Cima publishing.

Davies, T. and Crawford, I., (2011). Business accounting and finance. Pearson.

Hansen, D., Mowen, M. and Guan, L., (2007). Cost management: accounting and control. Cengage Learning.

Hoque, Z., (2002). Strategic management accounting. Spiro Press.

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