Management Accounting Report
Brent CaronJoey DecicioBridget MacCallum Damian RivelliFrancisco VelaBAD 2 – Section 4261Barbara Croteau3/12/15
Water Play, Inc.
Table of ContentsIntroduction................................................................................3Identifying Cost Categories........................................................3Bill of Materials.........................................................................................................3Labor Routing and Costs schedule............................................................................4Manufacturing Overhead Budget..............................................................................4Selling and General Administrative Expenses...........................................................5Discretionary Costs....................................................................................................5
Consolidated Income statement.................................................6Break-even Point........................................................................................................7Operating Leverage...................................................................................................7Margin of Safety........................................................................................................8
Comments on Projected Financial Performance........................8Appendices..................................................................................9A-1 Bill of Materials...................................................................................................9A-2 Labor Routing and Costs.....................................................................................9A-3a Manufacturing Overhead Budget....................................................................10A-3b Manufacturing Overhead Budget Categorized by Cost...................................10A-4a Selling and Administrative Expense................................................................11A-4b Selling and Administrative Expense Categorized by Cost...............................12A-5a Contribution Income Statement......................................................................12A-5b Contribution Income Statement Pie Chart......................................................12A-6 Break-even point, Operating Leverage, and Margin of Safety Calculations.....13
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Introduction
The analysis in this report focuses on the management reports and
accounts that provide accurate and timely financial and statistical
information that aid manager’s decision making for start-up company,
Water Play, Inc. This report will identify the different types of costs for the
annual budget period, as well as a prepared contribution format income
statement, which will show the amount available to cover fixed cost and
generate a profit. In addition, break-even point, operating leverage ratio,
and margin of safety will be calculated and analyzed. Next, two full set of
budgeted financial statements for the first year of operations such as the
income statement, statement of retained earnings, balance sheet, as well as
a cash budget will be prepared by using forecasted unit sales, which will
reveal potential strengths and weaknesses that will be analyzed. Lastly,
these budgeted financial statements will be compared and analyzed to the
actual financial statements, using the actual data for the first two quarters;
variances.
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Identifying Cost Categories
Bill of Materials
All the materials in the Bill of Materials document, refer to Appendix
A-1, are considered variable costs. Variable costs are those costs that vary
depending on a company's production volume; they rise as production
increases and fall as production decreases. They are also considered to be
direct costs, which can be completely attributed to the production of
specific goods or services. Lastly, all the materials are considered to be
product costs, which are the direct materials, direct labor, and
manufacturing overhead used in making its products in manufacturing
companies, because everything listed are direct materials used to create the
Shark Scout Vehicle.
Labor Routing and Costs schedule
All of the costs in the Labor Routing and Costs schedule, refer to
Appendix A-2, are considered to be variable costs since the amount of hours
to assemble the shark scout vehicle vary by how much the company decides
to sell. These costs are also direct and product costs, because these hours
are refer ton as direct labor towards the manufacturing of the product.
Manufacturing Overhead Budget
The costs in the Manufacturing overhead budget, refer to Appendix A-
3a, are both fixed and variable costs. Fixed costs are costs that do not
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change with an increase or decrease in the amount of goods or services
produced these costs are essentially expenses that have to be paid by a
company, independent of any business activity. These costs are also both
period and product costs. Period costs are non-manufacturing costs not
included as part of the cost of purchased goods nor manufactured goods.
These costs are also expensed straight to the income statement in the
period in which they are incurred. Lastly, they are both direct and indirect
costs. Indirect costs are Indirect costs are costs that cannot be accurately
attributed to specific cost objects. Refer to Appendix A-3b pertaining to the
different cost categories in the Manufacturing Overhead Budget.
Selling and General Administrative Expenses
The costs in the Selling and General Administrative Expenses, refer to
Appendix A-4a, are considered to be both fixed and variable costs. Every
cost is also categorized as a period costs, since these costs are not incurred
in the manufacturing process. Also for this reason, they are categorized as
indirect costs. Refer to Appendix A-4b pertaining to the different cost
categories in the Selling and General Administrative Expenses.
Discretionary Costs
Discretionary costs are costs that management has decided that can
be reduced in the short term. Advertising, as per a company decision, is a
discretionary cost because the company can decide how much they would
like to spend on promoting the company. Training, which is also up to the
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company, would be a discretionary cost because management makes the
decision on how much time they want to train their employees. Fringe
benefits are up to management because they make the decision to provide
benefits such as health insurance plans, retirement plans, and
hospitalization plans. As for research and development it would be
considered a discretionary cost because management also decides how
much they would like to spend on research in order to build their company.
The management team of this company has decided that for this year, none
of these costs fit under the discretionary cost category due to it being a
startup company. The company has no discretionary costs right now
because all of the costs that would typically be discretionary such as
advertising, training, fringe benefits, research and development, and sales
office supplies will be utilized as committed costs to ensure the company’s
growth for this first year.
Consolidated Income statement
A predicted contribution format income statement has been prepared
based on an expected production of 72,000 units annually, with a retail
price of $24,000 per unit. A contribution format income statement is a
statement in which all variable expenses are deducted from sales to arrive
at a contribution margin, from which all fixed expenses are then subtracted
to arrive at the net profit or loss for the period. This is an excellent form of
presentation, because the contribution margin clearly shows the amount
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available to cover fixed costs and generate a profit (or loss). Refer to to
Appendix 5a to view the contribution format income statement and refer to
to Appendix 5b to view a visual of how much variable expenses and fixed
expenses are deducted from sales to come up with a net income.
Break-even Point
The break-even point for the company is at 49,023 units produced,
which come out to $1,176,552,598 sales dollars. Break-even point is the
point of balance between making either a profit or a loss. To find the volume
of units to break-even, total fixed expenses is divided by the contribution
margin per unit. To find the sales volume at break-even, total fixed expenses
is divided by the contribution margin percent (percentage of the sales
price). Refer to appendix A-6 for these calculations. If the company manages
to sell the predicted 72,000 units in this next year, it will have made a profit
of $217,546,000. We trust in our data collection team that these numbers
are not fictional, but they are very well attainable.
Operating Leverage
The current Operating Leverage, which measures the correlation
between net operating income to a given percent change in sales, of 3.13 is
a low degree, making it less responsive to a change in sales. Refer to
Appendix A-6 for calculations. This means that the fixed cost is
comparatively low to the Sales. With a low Operating Leverage, there is a
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lower increase in Revenue because they have to increase those costs
proportionally to make those sales.
Margin of Safety
The current Margin of Safety in dollars is $551, 447, 401.77, which
calculates the “cushion” of sales before the break-even point will be
reached if sales decrease. Refer to Appendix A-6 for calculations. This
means that Water Play, Inc. is healthy and has a safe amount of profitable
sales that will cover all of the fixed and variable costs. The current Margin
of Safety in percent shows that 31.9% of sales are profitable appearing as a
positive net operating income.
Comments on Projected Financial Performance
Management should note that the projected financial performance of
the company is durable and profitable with the current cost structure
because of the Low Fixed Cost Structure. This Low fixed Cost Structure
means that the Break Even Point is low, while the Margin of Safety is high;
the Operating Leverage is low, which results in a lower risk with a large
cushion of safety in case sales decrease.
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