At IPS you spend the first few years analyzing the industry,
comparing your firm’s financial health to other firms in the industry and
making sure that the financial statements are accurate. After a while you start
exploring the other areas of accounting and finance work in the firm. You
realize that accounting information is not only needed by external stakeholders
for evaluating the firm, but also by management to judge the efficiency and
optimality of operations. Your work expands to include Managerial Accounting.
“Congratulations!”
You have been promoted to the CFO position at IPS! You have
hardly settled into your new office when the CEO asks you to prepare a
financial report on the proposed Android01, as well as the MiniX and MiniY.
$2M has already been spent on market research, and IPS
wishes to determine if the new Android01 component be produced in a way that
will yield a profit.
“As you know,” the CEO says, “there are
different ways of allocating fixed overhead costs and our choice will affect
the cost-per-unit of Android01.” He continues, “I hope you can help
us understand the different choices and how they’ll impact our business.”
Your prior manufacturing experience makes you think that
examining an alternative method of assigning costs would also be prudent since
Android01 shares component assembly with a related product — Processor01.
In your conversation with the IPS production manager, he
alludes to the fact that a 30 percent markup is standard at IPS. While you’re
at it, you look for information on the variable costs per unit for different
levels of production so you can provide a recommendation on what level of
output will maximize profit.
Thinking you’ve got everything covered, you decide to take a
break. Just as your lunch arrives, you get a call from your CEO: “I almost
forgot to ask you about the Mini line!”
The CEO continues, “The new MiniY product has been so
successful that we would like to increase production. We will need a budget
projection. Also, the shared production costs for the Mini line have affected
the value of our premiere product, the MiniX — I would like you to provide me
with a profit or loss figure for the MiniX as well.
As you scramble to take notes, she continues: “I’ll
need a report summarizing your findings and projections.”
This project will require you to analyze operations costs
for the organization using managerial finance techniques. You will next
determine the level of production and prices that maximize the firm’s profit.
Finally, you will prepare a financial budget for the firm and present your
recommendations.
Begin by going to Step 1: Allocation of Costs.
You have been asked to look at production options for the
Android01, since production methods and allocation of costs have implications
for cost per unit. Two alternative methods of production are being considered.
Begin by gathering data (using financial information in decision making), then
determine the suitability of the project.
The production of Android01 will share some production
facilities and service divisions with Processor01. Fixed costs are $5 million
per year, and will be assigned at the rate of 30 percent to Android01 and 70
percent to Processor01.
The variable cost of the production facilities and service
divisions is $25 million per year. The square footage of factory space and
labor needed for the production of 500 units of Processor01 and 300 units of
Android01 are listed below.
Square Feet Labor
Processor01 (500 units) 70,000 120
Android01 (300 units) 30,000 80
The remaining cost for the production of Android01 is for
components, at $25,000 per unit.
Question 1: In Method B, what would be the cost per unit of
producing Android01 using factory space as the allocation basis? What would be
the cost per unit using labor as the allocation basis?
Before starting on your calculations, review materials on
production cost allocation.
Submit your Allocation of Costs Report and Calculations to
the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide
a narrative analysis in Word. Please note that narrative in this Project does
not mean audio. It rather means a presentation of the results of your analysis
using words and the important numbers. Your narrative analysis should summarize
the results of your analysis and make recommendations for the benefit of
company.
An alternate method of assigning costs is activity-based
costing.The major activities for the production of both Processor01 and
Android01 are fabricator setup and component assembly. There are 500 units of
Processor01 and 300 units of Android01 produced every year. There will be a
total of 25,000 setups per year for at a total cost of $10 million. Each unit
of Android01 will require 40 setups. There will be a total of 125,000 assemblies
per year at a total cost of $15 million. Each unit of Android01 will require
180 assemblies. The remaining cost for the production of Android01 is for
components, at $25,000 per unit.
Review Section 4.1, Activity-Based Costing and Management
and Section 4.2, Activity Based-Costing Method
Question 2: What would be the cost per unit of producing
Android01 using activity-based costing?
Note that in addition to the setup costs and assemblies
costs there are two more costs to add: (1) fixed costs of $5 million, which are
still distributed at a rate of 30 percent to Android01 and 70 percent to
Processor01, and (2) the cost of Android01 components at $25,000 per unit.
Discuss the differences in the cost per unit of Android01
using space as an allocation basis, using labor as an allocation basis, and
using activity-based costing. Which method do you think is the most accurate
way to assign costs?
Submit your Activity-Based Costing Report and Calculations
to the dropbox below. Submit a spreadsheet showing your calculations in Excel
and provide a narrative analysis in Word. Your narrative analysis should
summarize the results of your analysis and make recommendations for the benefit
of company.
Next, suppose IPS uses markup pricing for Android01. Fixed
costs are $4.5 million, and for a level of production of 300 units, the
variable cost per unit is $48,000.
Question 3: What is the price of the Android01 at 30 percent
markup over full cost?
Submit your Markup Pricing Report and Calculations to the
dropbox below. Submit a spreadsheet showing your calculations in Excel and
provide a narrative analysis in Word. Your narrative analysis should summarize
the results of your analysis and make recommendations for the benefit of
company.
When you have submitted your Allocation of Costs Report,
Activity-Based Costing Report, and Markup Pricing Report, continue to the next
step, whewre you will assess the profit-maximizing output level, prepare a
production cost budget, and produce a Profit or Loss Report.
The CEO’s next question is, “What level of output would
be required to maximize our profit on the Android01?” You have calculated
the variable cost per unit for different levels of production. From market
research, you have a schedule of prices for these levels. The information is
summarized in the table below:
Number of Units Variable
Cost per Unit ($) Sale Price
per Unit ($)
200
60,000
70,000
250
54,000
66,000
300
48,000
64,000
350
46,000
59,000
400
45,000
52,000
A recommendation on output could affect everyone in the
company, from management to sales, to the floor manager and assembly line
workers! You don’t want to get this one wrong so you take some extra time to
proof your calculations.
Question 4: Based on profit-maximization analysis, what
level of output should you recommend to the CEO?
Before starting your calculations, review materials on
profit maximization output.
Submit your Profit-Maximization Output Report and
Calculations to the dropbox below. Submit a spreadsheet showing your
calculations in Excel and provide a narrative analysis in Word. Your narrative
analysis should summarize the results of your analysis and make recommendations
for the benefit of the company.
Your CEO has also asked you to prepare a production cost
budget for the MiniY for May 20X8. The
actual costs in April 20X8 were as follows:
MiniY: Production Cost Budget
April 20X8
Production–Units of MiniY 3,000
Components cost (variable) 24,000,000
Labor cost (variable) 13,500,000
Rent (fixed) 6,000,000
Depreciation (fixed) 6,000,000
Other (fixed) 2,000,000
Total $51,500,000
For the month of May, the number of MiniY produced will
increase to 3,200, reflecting an anticipated sales increase related to a new
marketing campaign.
Question 5: Using the above information, prepare a budget
for May 20X8, stating the total cost. Use a spreadsheet to display your data
and calculations.
Before starting your calculations, review materials on
integrating accounting and financial information.
Submit your Production Cost Budget Report and Calculations
to the dropbox below. Submit a spreadsheet showing your calculations in Excel
and provide a narrative analysis in Word. Your narrative analysis should
summarize the results of your analysis and make recommendations for the benefit
of the company.
IPS operates a factory, which produces the MiniY and the
MiniX. During September 20X8, the factory produced 3200 units of MiniY and 3000
units of MiniX. The joint cost related to the operation was $3,000,000. MiniX
sells for $27,100 per unit and MiniY sells for $25,000 per unit. Allocate the
joint costs using the relative sales values of MiniY and MiniX.
Question 6: With the costs that you calculate, what is the
profit or loss associated with MiniY? NOTE: Assume that the variable and fixed
costs mentioned in Step 5 are also applicable to Step 6 when calculating the
profit or loss for MiniY
Before starting your calculations, review the materials on
integrating accounting and financial information.
Submit your Profit or Loss Report and Calculations to the
dropbox below. Submit a spreadsheet showing your calculations in Excel and
provide a narrative analysis in Word. Your narrative analysis should summarize
the results of your analysis and make recommendations for the benefit of the
company.
Step 7: Managerial Accounting Report to Management
Although you get frustrated at times with your CEO’s
constant requests for information, it is your job as a CFO to analyze that data
for her. You both understand that data provides a basis for sound operational
decision-making (integrating accounting and financial information). The CEO’s
final request is for an analysis and summary of financial projections for the
Mini and Android lines, based on the information gathered in the previous
steps.
You collect your previous reports and spreadsheets and pore
over them, looking for meaningful trends and patterns.
Submit your Managerial Accounting Report to Management in
the dropbox below
Before you submit your assignment, review the competencies
below, which your instructor will use to evaluate your work. A good practice
would be to use each competency as a self-check to confirm you have
incorporated all of them in your work.
3.1 Identify numerical or mathematical information that is
relevant in a problem or situation.
3.2 Employ mathematical or statistical operations and data
analysis techniques to arrive at a correct or optimal solution.
3.3 Analyze mathematical or statistical information, or the
results of quantitative inquiry and manipulation of data.
3.4 Employ software applications and analytic tools to
analyze, visualize, and present data to inform decision-making.
10.5 Develop operating forecasts and budgets and apply
managerial accounting techniques to support strategic decisions.
