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Current Structure

Discuss about the Report for Accounting for Managers of Cost and Profit.

The directors of the company have received three different proposals from their three senior staffs. To analyze the effect of the three proposals, it is important to determine the current and profit structure of the company (DRURY 2013). The cost & profit of the company, based on the information of last twelve months, are shown below:

Statement of Cost & Profit:-

 

Current Structure

Particulars

Unit

Cost p.u.

Amount

Sales

20000

130

2600000

Variable Manufacturing Cost

20000

50

-1000000

Fixed Maufacturing Cost

-400000

Variable Selling & Administrative Costs

20000

30

-600000

Fixed Selling & Administrative Costs

-300000

Profit

20000

15

300000

From the above statement, it can be stated that if the company continues with the current cost & profit structure, then it can earn profit of $3,00,000 in total and $15 per unit. In such consequences, it will generate sale revenue of $26,00,000 annually.

Now, if the company considers the proposal of the accountant, the propose cost & profit structure will be as follows:

Statement of Cost & Profit:-

 

1st Alternative

Particulars

Unit

Cost p.u.

Amount

Sales

20000

140

2800000

Variable Manufacturing Cost

20000

50

-1000000

Fixed Maufacturing Cost

-400000

Variable Selling & Administrative Costs

20000

30

-600000

Fixed Selling & Administrative Costs

-425000

Profit

20000

18.75

375000

The table indicates that the company can be able to increase its annual profit to $375000 from $300000 and the profit per unit will also increase to $18.75 from $15. The accountant has suggested that the sales volume will not fall if an advertisement campaign will be continued at national level. However, it has been observed that price and demand always inversely proportional to each other. Whenever, price of any commodity falls, the demand of the same uses to increase accordingly and if the price increases, then the demand moves downward (Rios et al. 2013). Power drill is not a necessary commodity and hence, its price and demand will react as per the general economic rule. The accountant has proposed for an advertisement campaign to prevent the fall of the sales, due to increase in price. Therefore, the success of the proposal is fully dependable on the success of the advertisement campaign. If the campaign fails to maintain the current sales level, then the sales revenue, as well as, the total profit, will fall and the proposal will not be able to fulfill the objective (Horngren et al. 2013).

The production manager has suggested to improve the quality of the product for increasing the sales volume. The projected cost & profit as per the suggestion and expectations of the production manager are calculated below:-

 

2nd Alternative

Particulars

Unit

Cost p.u.

Amount

Sales

25000

130

3250000

Variable Manufacturing Cost

25000

55

-1375000

Fixed Maufacturing Cost

-400000

Variable Selling & Administrative Costs

25000

30

-750000

Fixed Selling & Administrative Costs

-350000

Profit

25000

15

375000

It is quite evident that, by following this proposal, the company can increase its sales volume to $325000 from $260000. Subsequently, the total profit will also rise to $375000 from $300000. However, the profit per unit will remain same. If the company wish to earn profit in volume then the proposal is quite effective. However, it is not sure that the consumers of the product are interested in improved quality or not (Mitra 2016). If, the improved quality fails to attract more consumers, then the sales volume will not increase as per the projection. In that case, the extra cost for advertisement and production will force the total profit volume to decrease and the profit per unit will also move downwards accordingly (Weygandt et al. 2015).

Proposal of Accountant

The sales manager intends to lower down the selling price for first 3 months. The cost & profit structure for the first 3 months are shown below:

Statement of Cost & Profit:-

 

3rd Alternative

Particulars

Unit

Cost p.u.

Amount

Sales

10000

120

1200000

Variable Manufacturing Cost

10000

50

-500000

Fixed Maufacturing Cost

-100000

Variable Selling & Administrative Costs

10000

30

-300000

Fixed Selling & Administrative Costs

-85000

Profit

10000

21.5

215000

As the table describes, the company will surely earn higher profit per unit to $21.50 than the actual profit per unit of $15. It can also increase its total sales revenue comparatively. The company can sell almost half of last years’ sales volume within first three months in this year. Moreover, as mentioned above, fall in price can surely increase the demand of the product. However, when, the price will be increased after three months, that can create negative impact on the customers. The sales volume may fall down significantly that time, which may result in decrease of total sales volume. In that case, the additional profit, expected to be earned in the first 3 months, cannot help the company to earn more profits annually (Collier 2015).


2:- 
The cost & profit structure of the company as per the normal estimations are calculated below:

Particulars

Unit

Cost p.u.

Amount

Direct Material Cost

150000

2.5

375000

Direct Labor Cost

150000

3

450000

Variable Factory Overhead

150000

1.5

225000

Fixed Factory Overhead

150000

2

300000

Manufacturing Cost

150000

9

1350000

Variable Selling & Administrative Cost

150000

2

300000

Fixed Selling & Administrative Cost

150000

1.5

225000

Total Cost

150000

12.5

1875000

20% Mark Up

150000

2.5

375000

Selling Price

150000

15

2250000

Now, if the capacity of the factory is 200000 units, then the cost & profit structure of the company will as follows:

Particulars

Unit

Cost p.u.

Amount

Direct Material Cost

200000

2.5

500000

Direct Labor Cost

200000

3

600000

Variable Factory Overhead

200000

1.5

300000

Fixed Factory Overhead

200000

1.5

300000

Manufacturing Cost

200000

8.5

1700000

Variable Selling & Administrative Cost

200000

2

400000

Fixed Selling & Administrative Cost

200000

1.13

225000

Total Cost

200000

11.63

2325000

20% Mark Up

200000

2.33

465000

Selling Price

200000

13.95

2790000

From the above table, it can be stated that the selling price for 200000 units will be $13.95. Therefore, the bid for the supply to government department will be as per the following table:

Particulars

Unit

Cost p.u.

Amount

Selling Price

40000

13.95

558000

Less : Sales Commission

40000

2

80000

Bid Price

40000

11.95

478000

For the capacity level of 180000 units, the cost & profit structure is calculated below:

Particulars

Unit

Cost p.u.

Amount

Direct Material Cost

180000

2.5

450000

Direct Labor Cost

180000

3

540000

Variable Factory Overhead

180000

1.5

270000

Fixed Factory Overhead

180000

1.67

300000

Manufacturing Cost

180000

8.67

1560000

Variable Selling & Administrative Cost

180000

2

360000

Fixed Selling & Administrative Cost

180000

1.25

225000

Total Cost

180000

11.92

2145000

20% Mark Up

180000

2.38

429000

Selling Price

180000

14.3

2574000

According to the above table, the selling price for 180000 units will be $14.30. In that case, the bid price for the government supply will be as per the following table:

Particulars

Unit

Cost p.u.

Amount

Selling Price

40000

14.30

572000

Less : Sales Commission

40000

2

80000

Bid Price

40000

12.30

492000

Balance Sheet represents the closing balances of assets and liabilities. As costs are Nominal A/c. in nature, such financial items are not included in the balance sheet as assets. The closing balances of several cost related accounts are closed at the end of the year by adjusting it with Income Statement (Deegan 2013).

However, some costs can be shown in the asset side of the balance sheet, if the cost is paid in advance for the current year. Such costs are referred as Prepaid Expenses (Weil et al. 2013).

There are many costs, which are revenue expenditure in nature, but provide benefits in the following years also, i.e, advertisement cost. In that case, the part of the such expenses, which is attributable to the following years, are shown in the asset side of the balance sheet as Deferred Revenue Expenditure.

Proposal of Production Manager

It should be noted that the costs, which are incurred in cash, can only be shown as assets in the balance sheet, if paid in advance. The non-cash expenses, such as, depreciation or amortization, cannot be treated as assets in the balance sheet in any circumstances (Horngren et al. 2012).

Particulars

Amount

Indirect Cost

 $    98,400.00

Direct Labor Hour

25795

Machine Hour

9840

Indirect Cost per Labor Hour

 $               3.81

Particulars

Unit

Cost p.u.

Amount

Direct Material

2100

16.1

33810

Direct Labor

1400

12.7

17780

Indirect Overhead

1400

3.81

5334

TOTAL COST

 

32.61

56924

Particulars

Unit

Cost p.u.

Amount

Direct Material

2100

16.1

33810

Direct Labor

1400

12.7

17780

Indirect Overhead

525

10

5250

TOTAL COST

 

38.8

56840

Particulars

Amount

Minimum Total Cost

 $  56,840.00

Nos. of Trailers

350

Minimum Price per Trailer

 $        162.40

It is very necessary to ascertain the production cost accurately. Production cost is the most important factor for pricing purpose. It is the base of any pricing structure. Hence, the business firms give high focus on accurate production costs and adopt various costing method for calculating the productions costs properly (Kaplan and Anderson 2013).

In modern times, the production system has become complicated and advanced. In such scenario, it has become very tough to allocate the costs properly. Activity based costing is the most effective method for such accurate allocation of costs. It divides the various costs under different activity based cost pools and allocates the total costs of different departments into the different cost pools proportionately (Kaplan and Atkinson 2015).

Any business department is involved with various types of business activities. Hence, allocation of costs, according to departments, may not provide accurate production costs. Therefore, ABC costing allocates the costs according to the activities and helps the firm to identify actual expenses, incurred for various activities (Azizi 2012).

Thus, the production costs, derived from segmented activity based cost pools by using Activity Based costing method can be proved more helpful for proper ascertainment of production costs.

Reference:-  

Kaplan, R. and Anderson, S.R., 2013.Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.

Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning

Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013.Introduction to management accounting. Pearson Higher Ed

DRURY, C.M., 2013.Management and cost accounting. Springer.

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

Azizi, A., 2012. Activity Based Costing.Audit organization publication.

Mitra, A., 2016.Fundamentals of quality control and improvement. John Wiley & Sons

Deegan, C., 2013.Financial accounting theory. McGraw-Hill Education Australia

Weil, R.L., Schipper, K. and Francis, J., 2013.Financial accounting: an introduction to concepts, methods and uses. Cengage Learning

Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., 2012.Financial Accounting. Pearson Higher Education AU

Collier, P.M., 2015.Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013.Economics: Principles, problems, and policies. McGraw-Hill

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