Management Applications of Accounting

Introduction

Tools used in cost accounting provide businesses the ability to make more informed choices about the things they manufacture and then offer to end users. According to the findings of the research, they analyze the items in order to make lucrative decisions. The management of the Cookie Company wants to know which one of the company’s three goods brings in the most amount of revenue. In addition to that, it uses a variety of techniques to determine which product is the greatest. For example, Contribution Margin (CM), Absorption as well as Variable Costing, Internal Return Rate (IRR), Net Present Value (NPV), Variances, and Cash Budget make it possible for the corporation to monitor the product that performs the best.

Part 1: Contribution Margin (CM), Weighted Average CM and Breakeven

The Cookie Business offers three distinct cookies, including Chocolate chip, Sugar, and Specialty varieties. The Chocolate Chip variety has the highest CM, followed by the Specialty and Sugar varieties; yet, the Specialty variety has the fewest amount of units sold. Because Specialty has the lowest variable costs and the most units sold, it has the highest ratio of contribution margin per unit at 3.23, while Chocolate Chip has a ratio of 0.79 and Sugar has a ratio of 0.69. It has been determined that the weighted average contribution margin is 1.018, which indicates that sales are 1.018 times the amount of fixed costs. When considering a sales mix of this kind, the weighted average breakeven is the method of choice for determining the absolute least number of units that must be moved. The company has to sell a total of 122,783 units before it can be profitable, and every unit after that will bring in a profit for the business (Wuni, & Shen, 2020).

Cookie Busines

Chocolate Chip

Sugar

Specialty

Total

Units Sold

1,500,000

980,000

300,000

2,780,000

Sales

$ 1,875,000.00

$ 882,000.00

$ 1,050,000.00

$ 3,807,000.00

Less: Variable Costs

$ 690,000.00

$ 205,800.00

$ 81,000.00

$ 976,800.00

Contribution Margin

$ 1,185,000.00

$ 676,200.00

$ 969,000.00

$ 2,830,200.00

Less: Common Fixed Costs

$ 125,000.00

Profit

$ 2,705,200.00

Per item Contribution Margin

0.79

0.69

3.23

Weighted Average Contribution Margin

1.018

Break-even point in units

122,783

Part 2: Value of Ending Inventory under Different Costing Methods

Both the fixed and variable Cookie business absorption rates are $2.05 per thousand. It’s a sign that fixed expenses are lower than those for generating revenue. Both absorption and variable costs result in the same net operating income. Unsold items are counted as closing inventory, and the numbers will never be the same because of price fluctuations. One of the researches raises concerns about the use of marginal and absorption costing comparisons in managerial decision making. Management of cookie shops is urged to switch to variable costing from absorption costing.

Cookie Business

Productions Costs:

Direct material

$ 0.60

Direct labor

$ 1.00

Variable manufacturing overhead

$ 0.40

Total variable manufacturing costs per unit

$ 2.00

Fixed manufacturing overhead per year

$ 139,000.00

In addition, the company has fixed selling and administrative costs:

Fixed selling costs per year

$ 50,000.00

Fixed administrative costs per year

$ 65,000.00

Selling price per cookie

$ 3.75

Number of cookies produced

2,780,000

Number of cookies sold

2,600,000

Unsold Inventory

180,000

Fu l (absorption) costing:

Full cost per unit

$ 2.05

Ending Inventory Full (absorption) costing

$ 369,000

Variable costing:

Variable cost per unit

$ 2.00

Ending Inventory Full (absorption) costing

$ 360,000

Part 3: Increase/Decrease in Profit because of Special Order

Profitability has taken a hit as a result of the sluggish business and the need to offer cookies at a discount. Meanwhile, the business has landed a special wedding order that’s expected to bring around $3,150. There will be a $600 up-charge for cookies with special designs. Profit for the business is $2750 if cookies are offered at a $2.75 discount. In light of present market conditions, accepting the wedding customization request would result in a $400 rise to the company’s bottom line. Until the company can no longer make a profit by offering the cookie for $3.75, it must continue to accept such orders.

Cookie Business

Number of cookies needed

1,000

Discounted price per cookie

$ 2.75

Normal price per cookie

$ 3.75

Cost of special printed design per cookie

$ 0.50

Cost of tool needed to make the design

$ 100.00

Revenue for special order

$ 3,750

Costs for special order:

Design cost

$ 500

Tool cost

$ 100

Net increase (decrease) in profit

$ 3,150

Part 4: Internal Rate of Return for the New Equipment Purchase

The annuity factor present value of a $241,669 cookie company is quite close to the initial investment amount. With an internal rate of return of 8.03 percent, a project fails to meet the required profitability threshold for the discount rate. Management should not make decisions based only on NPV and IRR because of how unreliable they are, according to research. With a negative NPV of $8330, it’s obvious that management should turn down the idea.

Cookie Business

As the owner of the Cookie Business, you are considering the following investment:

Purchase of new equipment

$ 250,000.00

Expected annual increase in sales

$ 48,017.50

Time frame

7

years

Acceptable rate needed

9%

Calculate the Internal Rate of Return:

PV of annuity factor

241,669.8

Internal rate of return

8.00%

Accept or reject

REJECT

Ethical Concerns

One of the partners’ brothers owns the store where the necessary equipment for the new venture will be acquired. The corporation is being coerced into buying his machinery because of his insistence. When a relationship compels one to make a choice, moral questions naturally emerge. If honest deals, adequate paperwork, and other legal requirements are ignored, integrity suffers. Because of this, it’s clear that there is no integrity or honesty involved in these business dealings. IRR and NPV both indicate that the equipment will not increase the company’s profits. The owner is not behaving professionally if he pressures the company’s management into purchasing the equipment. There would be no ethical issues with the deal if either management or the board had shown reluctance to purchase the equipment (Sargiacomo, & Walker, 2020).

Part 5: Cash Receipts

Sales revenue is used to predict costs in order to create a budget (credit and cash). Unlike credit sales, which are documented upon receipt of payment in the trade receivables, cash sales are reported upon receipt of payment. Eighty percent of a cookie shop’s revenue comes from same-month cash purchases, while twenty percent comes from credit sales paid for the following month. In January, the business will break even, in February it will generate a profit of $115,000, and in March it will lose $18,000 if it has to fund its monthly costs of $150,000. The cookie company has to figure out why sales have dropped below breakeven units so that they can develop a plan to boost sales in the next month. Because of the unpredictable nature of sales, management must gather information from December through March (Mosteanu, & Faccia, 2020).

Cookie Business

The budgeted credit sales are as follows:

December last year

$ 250,000

January

$ 125,000

February

$ 300,000

March

$ 90,000

Collection:

Month of the sale

80%

Month following the sale

20%

Estimatedcashreceipts

January

February

March

Last month’s sales

$ 50,000

$ 25,000

$ 60,000

Current month’s sales

$ 100,000

$ 240,000

$ 72,000

Total

$ 150,000

$ 265,000

$ 132,000

Part 6: Material and Labor Variances

Management often uses variances because they are a useful tool for revealing discrepancies between actual and planned spending. We see a positive variation in direct material quantity and a negative variance in direct material costs. This means that materials are being used effectively, but at a pace that exceeds what was anticipated in the budget. Both low utilization and high rate differences in labor are undesirable. As a result, the corporation is paying the workers more than was originally planned. Management should care about how effectively their employees use their resources, which they may do by giving them the right kind of instruction. They’ll have to plan ahead for the material purchases, and they have the option to hunt for alternative vendors that provide the same thing at a lower price.

Cookie Business

Actual Cost of Direct Materials

$ 225,000

7500

Standard Cost of Direct Materials

$ 224,800

7252

Actual Materials Used

30

Standard Materials Used

31

Actual Direct Labor Rate

$ 15.50

Standard Labor Rate

$ 15.00

Actual Hours Worked

45

Standard Hours Worked

40

Amount

Favorable/ Unfavorable

Calculate Materials Variances:

Materials Price Variance

$ (6,000)

UnFavorable

Materials Quantity Variance

$ 225,000

Favorable

Calculate Labor Variances:

Labor Rate Variance

$ (23)

UnFavorable

Labor Efficiency Variance

$ (78)

UnFavorable

Conclusions and Recommendations

Cookie’s goods are successful enough to justify the company’s existence. Sales mix contribution is more than double the fixed expenses, as shown by the weighted average contribution margin being more than 1.0. Variable costing is more realistic and should be used by management. Since business is sluggish, the firm stands to gain financially by taking the wedding order. In the absence of considering inflation and taxes, IRR and NPV alone might mislead the company. The cookie company has planned its sales budget to meet its monthly costs of $150,000, but since March will result in a loss of $18,000, management must determine the cause of the unexpected drop in revenue. If there is a negative variation in the cost of materials, the company can look for a new supplier, while management can improve productivity by providing staff with more training on how to operate more efficiently. Costing tools are meant for for use by the company’s upper management; financial accountants and anyone outside the company should not have access to the data they generate.