Assignment on Intermediate Management Accounting
Project 2
To Mr. Alan,
President of BBCC,
Subject: Activity Based cost and Revised Margin of Choco Bars along with new product analysis and pricing- Skinny Bar and budgeting requirement
Sir,
We have since recomputed the indirect cost of manufacturing for bars based on activity to ascertain the true margin of each division or type of bar. The computation has been presented as under:
1a
Activity and activity driver used:
| Activity | Activity Driver |
| Scheduling Production Run | Number of Production Runs |
| Machine Set up | Set up Hours |
| Product Administration | Number of Production Lines |
| Machine Operations | Machine Hours |
| Inspections | Number of Inspections |
| Research & Development | R & D Hours |
| Plant lease |
Activities
| Activity | The-Bar | Alamonde | Salt-Lick | Total |
| Production Volume (bars)* | 776000 | 528000 | 302500 | 1606500 |
| Batch Size | 4000 | 3000 | 2500 | |
| Machine Hours per Batch | 13 | 18 | 19 | |
| Number of Annual Production Run | 194 | 176 | 121 | 491 |
| Number of Inspection Per Batch | 2 | 3 | 3 | |
| Set Up time | 1 | 3 | 4 | |
| Number of Product Lines | 1 | 1 | 1 | |
| Research & Development Hours | 75 | 450 | 525 |
Computation of Margin
| Ingredient | Price | The- Bar | Almonde | Salt-Lick | Total | ||||
| Quantity | Cost | Quantity | Cost | Quantity | Cost | Quantity | Cost | ||
| Chocolate Liquor | 5.55 | 27160 | 150738 | 18480 | 102564 | 8894 | 49359 | 54534 | 302661 |
| Cocoa Butter | 6.1 | 10321 | 62957 | 7022 | 42837 | 2753 | 16792 | 20096 | 122586 |
| Cocoa Powder | 1.18 | 5432 | 6410 | 2218 | 2617 | 2118 | 2499 | 9768 | 11526 |
| Cane Sugar | 0.7 | 10321 | 7225 | 7022 | 4916 | 6247 | 4372 | 23590 | 16513 |
| Emulsifier | 0.8 | 462 | 369 | 739 | 590 | 212 | 169 | 1413 | 1128 |
| Vanilla | 70 | 625 | 43728 | 370 | 25872 | 424 | 29645 | 1419 | 99245 |
| Almonds | 10 | 0 | 1109 | 11088 | 0 | 1109 | 11088 | ||
| Himalayan Salt | 5.5 | 0 | 0 | 529 | 2912 | 529 | 2912 | ||
| Cost of Ingredients | 271427 | 190484 | 105748 | 567659 | |||||
| Wrappers | 0.08 | 776000 | 62080 | 528000 | 42240 | 302500 | 24200 | 1606500 | 128520 |
| Total Material Cost | 333507 | 232724 | 129948 | 696179 | |||||
| Direct Labour Hour | 33.1 | 4105 | 135876 | 3744 | 123926 | 2125 | 70338 | 9974 | 330140 |
| Prime Cost | 469383 | 356650 | 200286 | 1026319 | |||||
| Indirect Cost | |||||||||
| Variable | |||||||||
| Plant Utilities | 13.0 | 2522.0 | 32699.8 | 3168.0 | 41075.7 | 2299.0 | 29808.4 | 7989.0 | 103584.0 |
| Maintenance | 11.2 | 2522.0 | 28274.6 | 3168.0 | 35517.0 | 2299.0 | 25774.5 | 7989.0 | 89566.0 |
| Fixed | |||||||||
| Quality Control | 29.3 | 388.0 | 11376.1 | 528.0 | 15480.8 | 363.0 | 10643.1 | 1279.0 | 37500.0 |
| Computer and Supplies | 71958.2 | 66444.5 | 49597.3 | 188000.0 | |||||
| Plant & Equipment Amortisation | 18.8 | 2522.0 | 47352.6 | 3168.0 | 59481.8 | 2299.0 | 43165.6 | 7989.0 | 150000.0 |
| Research & Development | 257.1 | 75.0 | 19285.7 | 450.0 | 115714.3 | 525.0 | 135000.0 | ||
| Indirect Plant Salary & Wages | 55912.0 | 76073.6 | 61014.4 | 193000.0 | |||||
| Plant Lease | 0.1 | 776000.0 | 94675.4 | 528000.0 | 64418.3 | 302500.0 | 36906.3 | 1606500.0 | 196000.0 |
| Total Cost | 811631.66 | 734427.47 | 572909.87 | 2118969.00 | |||||
| Sales | 776000.0 | 1164000.00 | 528000.0 | 897600.00 | 302500.0 | 605000.00 | 2666600.0 | ||
| Gross Margin | 352368.34 | 163172.53 | 32090.13 | 547631.0 |
1b
Based on above, it may be seen that profit of the Bar has increased while other segment has decreased based on true mapping of cost. Thus, The- Bar is the most profitable segment of the company.
Further , the gross margin of each division has changed as method of allocation of indirect cost has changed which resulted in true mapping of cost based on various drivers rather than a single driver which is in case of traditional costing. Thus, when indirect cost is allocated based on range of factors the true cost is mapped and the gross margin changes.
Further, under activity based costing system true parameter are identified that influence the cost so that there is proper mapping of cost against the product. This true mapping helps to ascertain the actual cost and the true margin of product. Thus, it ensures better decision making.
Base on above deliberation it may be concluded that activity based costing system is better than traditional system wherein a single parameter is relied for indirect cost allocation.
2a New product analysis and pricing — Skinny-Bar
Steps have been taken to compute break even sales in dollar for Skinny Bar Product launched in 20X5. The computation of break even sales $ based on past data has been computed as under:
| Sl No | Particular | Amount |
| 1 | Actual Sales | 288600 |
| 2 | Variable Cost | 187590 |
| 3 | Contribution | 101010 |
| 4 | Margin of Safety | -15% |
| 5 | Break Even Point | 331890 |
| 6 | Fixed Cost | 144300 |
Further, allocation of cost under various head to determine the actual profit or loss made in 20X5 has been computed as under:
| Sl No | Particular | Amount |
| 1 | Actual Sales | 288600 |
| 2 | Cost of Direct Material | 115440 |
| 3 | Labour Cost | 31746 |
| 4 | Variable Manufacturing Overhead | 40404 |
| 5 | Fixed Manufacturing Overhead | 43290 |
| 6 | General & Administrative Cost | 101010 |
| 7 | Net Income | -43290 |
Based on above, it may be inferred that there was loss of 43,290 in 20X5 as the cost increased the sales price by a significant amount. Accordingly steps have been taken to recompute the true cost per unit to determine the sale price of the product:
2b
| Sl No | Particular | Amount per unit |
| 1 | Material cost | 0.74 |
| 2 | Labour Cost | 0.2035 |
| 3 | General & Administrative Cost | 0.6475 |
| 4 | Indirect Cost | |
| Variable | ||
| Plant Utilities | 0.0421 | |
| Maintenance | 0.0364 | |
| Fixed | ||
| Quality Control | 0.01466 | |
| Computer and Supplies | 0.09273 | |
| Plant & Equipment Amortisation | 0.06102 | |
| Research & Development | 1.00000 | |
| Indirect Plant Salary & Wages | 0.07205 | |
| Plant Lease | 0.12200 | |
| 5 | Total Cost per unit | 3.0320 |
| 6 | Mark Up | 0.6064 |
| 7 | Sales Price per unit | 3.6385 |
Sale price per unit should be 3.6385$ as the said price shall compensate for cost and shall provide the company a margin of 20% which was earlier absent. Further, the sales price is much higher than earlier ascertained sale price but the same shall properly cover the true cost of the product and shall provide fair return to the company. Thus, the proposed price is adequate as it covers true cost of production.
3a Budgeting Analysis
Further, production budget based on demand forecasted for three units have been prepared and enclosed as under:
Forecasted sales
| Sales | |||||
| Sl No | Particular | The- Bar | Alamonde | Salt-lick | Total |
| 2008 | |||||
| 1 | Q1 | 180400 | 118800 | 66000 | 365200 |
| 2 | Q2 | 187000 | 123200 | 69300 | 379500 |
| 3 | Q3 | 206800 | 134200 | 77000 | 418000 |
| 4 | Q4 | 178200 | 116600 | 68200 | 363000 |
| 2009 | |||||
| 5 | Q1 | 188600 | 124200 | 69000 | 381800 |
| 6 | Q2 | 193200 | 127650 | 70150 | 391000 |
Forecasted production based on organisation rule of maintaining 7% inventory
| Production | |||||
| Sl No | Particular | The- Bar | Alamonde | Salt-lick | Total |
| 2008 | |||||
| 1 | Q1 | 193490 | 127424 | 66000 | 386914 |
| 2 | Q2 | 188386 | 123970 | 69300 | 381656 |
| 3 | Q3 | 204798 | 132968 | 77000 | 414766 |
| 4 | Q4 | 165726 | 108438 | 68200 | 342364 |
| 2009 | |||||
| 5 | Q1 | 188922 | 124442 | 69000 | 382364 |
| 6 | Q2 | 192304 | 127030 | 70150 | 389484 |
Forecasted ingredient inventory based on organisation system of maintaining 9% inventory
| Ingredient- Sugar | ||||||
| Sl No | Particular | The- Bar | Alamonde | Salt-lick | Total | Inventory |
| 2008 | 482 | |||||
| 1 | Q1 | 2573.417 | 1694.739 | 1363.371 | 5631.528 | 5652.256 |
| 2 | Q2 | 2505.534 | 1648.801 | 1431.54 | 5585.875 | 5630.606 |
| 3 | Q3 | 2723.813 | 1768.474 | 1590.6 | 6082.888 | 5990.396 |
| 4 | Q4 | 2204.156 | 1442.225 | 1408.817 | 5055.198 | 4600.23 |
| 2009 | ||||||
| 5 | Q1 | 2512.663 | 1655.079 | 1425.343 | 5593.084 | 5602.368 |
| 6 | Q2 | 2557.643 | 1689.499 | 1449.099 | 5696.241 | 5183.579 |
| Ingredient- Alamonde | ||||||
| Sl No | Particular | The- Bar | Alamonde | Salt-lick | Total | Inventory |
| 2008 | 23 | |||||
| 1 | Q1 | 0 | 267.5904 | 0 | 267.5904 | 268.0207 |
| 2 | Q2 | 0 | 260.337 | 0 | 260.337 | 262.0376 |
| 3 | Q3 | 0 | 279.2328 | 0 | 279.2328 | 274.5966 |
| 4 | Q4 | 0 | 227.7198 | 0 | 227.7198 | 207.225 |
| 2009 | ||||||
| 5 | Q1 | 0 | 261.3282 | 0 | 261.3282 | 261.8173 |
| 6 | Q2 | 0 | 266.763 | 0 | 266.763 | 242.7543 |
| Ingredient- Vanilla | ||||||
| Sl No | Particular | The- Bar | Alamonde | Salt-lick | Total | Inventory |
| 2008 | 29 | |||||
| 1 | Q1 | 155.7595 | 89.1968 | 92.4 | 337.3563 | 338.5467 |
| 2 | Q2 | 151.6507 | 86.779 | 97.02 | 335.4497 | 338.1759 |
| 3 | Q3 | 164.8624 | 93.0776 | 107.8 | 365.74 | 360.255 |
| 4 | Q4 | 133.4094 | 75.9066 | 95.48 | 304.796 | 277.3644 |
| 2009 | ||||||
| 5 | Q1 | 152.0822 | 87.1094 | 96.6 | 335.7916 | 336.3446 |
| 6 | Q2 | 154.8047 | 88.921 | 98.21 | 341.9357 | 334.1615 |
Based on above projected material purchase budget has been enclosed for vanilla as under:
| Direct Material Purchase Budget Vanila | |||||||
| Sl No | Particular | The- Bar | Alamonde | Salt-lick | Purchase | Rate | Amount |
| 2008 | |||||||
| 1 | Q1 | 156 | 89 | 92 | 337.3563 | 70 | 23614.94 |
| 2 | Q2 | 152 | 87 | 97 | 335.4497 | 70 | 23481.48 |
| 3 | Q3 | 165 | 93 | 108 | 365.74 | 70 | 25601.8 |
| 4 | Q4 | 133 | 76 | 95 | 304.796 | 70 | 21335.72 |
| 2009 | |||||||
| 5 | Q1 | 152 | 87 | 97 | 335.7916 | 70 | 23505.41 |
| 6 | Q2 | 155 | 89 | 98 | 341.9357 | 70 | 23935.5 |
| Total | 141474.9 |
Further, the projected cash disbursement schedule for Vanilla vendors is as under:
| Cash Disbursement Schedule | |||
| Sl No | Particular | Purchases | Payment |
| 2008 | |||
| 1 | Q1 | 23614.94 | 23491.95 |
| 2 | Q2 | 23481.48 | 23508.17 |
| 3 | Q3 | 25601.8 | 25177.74 |
| 4 | Q4 | 21335.72 | 22188.94 |
| 2009 | |||
| 5 | Q1 | 23505.41 | 23071.47 |
| 6 | Q2 | 23935.5 | 19148.4 |
Thus, the following cash outlay shall be required for budgeted production. In addition, it is forecasted that there shall be a system upgrade and the cash outflow in relation to said upgradation has been presented as under:
| Cash Budget-For System Updgrade | |||||||||||||
| Sl No | Particular | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| Hardware & Software | |||||||||||||
| 1 | Analysis | ||||||||||||
| 2 | Design | 112900 | |||||||||||
| 3 | Implementation | 492500 | |||||||||||
| Other cost | |||||||||||||
| 4 | Analysis | 65158 | 26063.2 | 39094.8 | 26063.2 | 39094.8 | 26063.2 | 0 | 0 | 13031.6 | 13031.6 | 13031.6 | |
| 5 | Design | 0 | 39019.8 | 39019.8 | 19509.9 | 19509.9 | 39019.8 | 19509.9 | 19509.9 | 39019.8 | 39019.8 | 39019.8 | 78039.6 |
| 6 | Implementation | 34263 | 34263 | 17131.5 | 51394.5 | 34263 | 34263 | 51394.5 | |||||
| 7 | Total Cash outflow | 670558 | 65083 | 78114.6 | 45573.1 | 58604.7 | 99346 | 537723 | 36641.4 | 103445.9 | 86314.4 | 86314.4 | 129434.1 |
| Analysis | 25% | 35% | 50% | 60% | 75% | 85% | 85% | 85% | 90% | 95% | 100% | ||
| Design | 0 | 10% | 20.0% | 25% | 30% | 40% | 45% | 50% | 60% | 70% | 80% | 100% | |
| Implementation | 10% | 20% | 25% | 40% | 50% | 60% | 75% |
3b
Based on above it may be inferred that the highest cash outflow is in first three quarter of the month and shall result in total outflow of $813756 and company shall be required to manage such cash flow either using loan or any other means as it shall be capital expenditure for upgradation of software in the organisation. Thus, the amount of $ 813756 is the maximum that shall be required for software upgradation in addition to the requirement of payment for direct ingredients.
4 Conclusion
Based on above, it may be inferred that organisation must upgrade itself to just in time concept so as to save the inventory holding cost and also the number of order by asking the supplier to be near the factory. Further, the organisation must find more suitable activity driver as the current driver does not truly capture the cost of production .
