Assignment on Intermediate Management Accounting – 1386685

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 .