Project 3: Report to Management

Project 3: Report to Management

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.

Step 1: Allocate 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. There are two alternative methods of production being considered. Begin by gathering data (using financial information in decision making), then answer various questions to determine the suitability of the project.

Production A

Costs are as follows:

• $4.5 million per year in rent for factory and machinery

• components and labor in the amount of $12 million will produce 300 units per year

Production B

In an alternative production method, the production of Android01 will share some production facilities and service divisions with Processor01. Fixed costs are $5 million per year, and are to 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 $20 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.

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?

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.

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.

Step 2: Activity-Based Costing

An alternate method of assigning costs is activity-based costing. The major activity for the production of both Processor01 and Android01 is component assembly. There will be a total of 125,000 assemblies per year for the production of 500 units of Processor01 and 300 units of Android01 at a total cost of $25 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.

Question 2: What would be the cost per unit of producing Android01 using activity-based costing?

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.

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.

Step 3: Markup Pricing

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 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.

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.

Step 4: Choose the Profit-Maximizing Output Level

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:

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 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.

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.

Step 5: Budget

Your CEO has asked you to prepare a production cost budget for the MiniY for May 20X8.  The actual costs in April 20X8 were:

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 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.

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.

Step 6: Profit or Loss

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 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.

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.

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.

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.

ADDITIONAL NOTES

For the first 3 cost allocation questions (per square foot, labor hours, and activity based costing), note these are exercise in determining the unit cost for Android1 based on 3 different scenarios.

The basic formula for unit cost is where unit cost = total cost/number of units

Total cost = component cost + proportionate share of variable cost + proportionate share of fixed cost

Proportionate share relates allocation basis = factory space or labor hours or activity based approach

Example:  Parts and materials for a HP laptop is $300, and production cost of a HP laptop and a Lenova Laptop is $200,000, and fixed cost for the production facilities is $18,000.  HP will produce 200 items at the above costs

HP occupies 1000 sq and Lenova occupies 500 sq

Labor hours for assembling HP is 6 hours and Lenova 8 hours

Sales activities for HP is such that HP sells $1,500,000 and Lenova sells $1,800,000

To determine unit cost of HP laptop = parts and material cost + proportionate share of production cost + proportionate share of fixed cost

Unit cost based on factory space:  

300 + ((1000/1500)*200,000)/200 + ((1000/1500)*18,000)/200

300 + 666.67 + 60 = 1,026.67

Markup Pricing:  This area requires that you first calculate the unit cost per product, then apply the markup percentage to determine Price OR

P = unit cost * (1 + markup %)

Choosing profit maximizing level of output:

Calculate the variable costs per unit for different levels of production.  You are given number of units, variable cost per unit, and sales price per unit in a table.  Extend the table to calculate profit at each level, then determine which level where profit is at the maximum.

Production cost budget for May 20X8:

You are given actual cost of production for April 20X8.  The cost is broken down between variable cost and fixed cost.  Your task is project the cost budget for May at an output level of 3200 units.  This exercise will test your knowledge of how variable cost and fixed cost behave in a production process.  

Profit or loss associated with MiniX:

Start with the formula for calculating profit then fill in the respective variables:  

Profit = Total Revenue - Total Cost

= P * Q - (VC*Q + FC *Q) or consider the proportionate share of VC + FC

                                           where P * Q - (%VC*Q + %FC * Q)

Note that the allocation is based on "sales value" NOT labor hours, factory space or activity based costing....

Finally, briefly discuss the issues in developing budget and market forecasts for strategic initiatives.