Muhammad Adil

 Cost related budgeting and other projections Table of content Description Pages Number Answer of Q no 1 3 to 4 Answer of Q no 2 5 to 8 Answer of Q no 3 9 to 10 Answer of Q no 4 11 to 12 References 13 Answer of Question no 1 Output of goods that can be manufactured by company in a certain period of time. This is concept is called “Production Capacity”. Production capacity can be defined in two ways: 1) Theoretical capacity Full utilization of production resources (space, equipment and people with 100% efficiency) of a company. It is also called ideal or standard production capacity of a company 2) Practical capacity In real life one cannot achieve 100% utilization of production capacity because of following reasons: Shortage of labor or labor strikeout Idle time Machine breakdown or maintenance or overhauling issue Vacations of employee Outside problem of a company which affects its production capacity such as weather, environment and laws and regulations Because of the above reasons company has set practical capacity in addition to theoretical capacity Production Constraints: Despite of availability of production resources there are multiple constrain which restricts the company to meet its required production goals or capacity. Such constraints could be Set up and idle time Labor time Machine maintenance Material shortage Holidays or vacations etc. All of the above constrains restricts the company to ace its production goals that is why all these are considered as Production constraints In the given scenarios of Kiewa milk co, Production constraints can be limitation in milk processing capacity, low quality packaging material received from supplier which is subsequently returned to him, such returned could lead to stoppage of production because of lack of quality raw material. Limited availability of machine hours can also act as production constraints. Relevant Range Activity level within which cost or revenue element assumption remains valid. For example 1. If a company produces 500 to 1,000 units fixed cost will be $50,000 however when company increases its production by more than 1,000 units it will also affects the fixed cost. 2. If a company purchase bulk quantity of goods ranges from 1,000 to 10,000 pieces then supplier will provide 5% purchase discount however when company purchase above 10,000 units supplier will provide 7.5% purchase discount. Here the relevant range in example no 1 is 500-1,000 units and in second example 1,000 to 10,000 pieces is considered as relevant range [ CITATION Mar20 \l 1033 ] [ CITATION Raj20 \l 1033 ] Answer of Question no 2 PART (i) 5 YEAR SALES BUDGET YEAR SALES UNITS(IN MILLIONS) SALES PRICE($) SALES VALUE(IN MILLIONS- 5 YEAR PRODUCTION BUDGET YEAR-             SALES UNITS(IN MILLIONS-             Ending inventory           Ingredients and packing - Finished Goods - Total Ending Inventory - Beginning Inventory           Ingredients and packing - Finished Goods - Total Beginning Inventory -             Production units- PART (ii) Budgeted schedule of Cost of Goods Manufactured (Amount in million) `- Direct Material Purchases $28.96 $41.70 $60.09 $86.53 $124.60 Opening direct material $0.29 $0.42 $0.60 $0.86 $1.24 Closing direct material $0.35 $0.47 $0.72 $1.03 $1.49 Direct Material cost $28.90 $41.64 $59.97 $86.35 $124.35 Direct Labor cost $1.60 $2.40 $3.45 $4.97 $0.00 Manufacturing overheads $49.92 $71.89 $103.60 $149.18 $214.82 Total manufacturing cost $80.42 $115.93 $167.02 $240.51 $339.17 Budgeted cost of goods manufactured $80.42 $115.93 $167.02 $240.51 $346.33 Part (iii) Budgeted schedule of Cost of Goods Sold (COGS) - Budgeted cost of goods manufactured $80.42 $115.93 $167.02 $240.51 $346.33 Beginning Finished Goods $274 $369 $531 $766 $1,103 Goods Available for Sale $355 $485 $698 $1,006 $1,449 Less: Ending Finished Goods 307 $442.61 $638.09 $918.85 $1,323.14 Budgeted Cost of Goods Sold $48 $42 $60 $87 $126 Gross Profit calculation - Sales (in million- Budgeted Cost of Goods Sold- Gross Profit- Part b Impact on sales and gross profit if the option Of upgrading the manufacturing facility is exercised - SALES VALUE(IN MILLIONS $79 $99 $124 $154 $193 increases by 100% 100% 100% 100% 100% 100% SALES VALUE in million after increased $159 $198 $247 $309 $385 Budgeted Cost of Goods Sold $48 $42 $60 $87 $126 Additional manufacturing cost   $4 $4 $4 $4 Revised Budgeted Cost of Goods Sold $48 $46 $64 $91 $130 Gross Profit $111 $152 $183 $217 $255 PART C Report to the Strategic Management As you have appointed me previously to analyses the firms future projection regarding production sales Gross profit and Cost cost of goods sold budget. I have done budgeting and find out company’s financial health and performance based on 5 years projections will be efficient and profitable. Advice to the strategic management As the management willing to increase its production capacity by 100% which is definitely result in positive numbers. Although from 2022 manufacturing overheads increased by $4 million Company will still be making Gross profit double than its previous year from 2022. It is my financial advice to strategic department to upgrade its production capacity and avail this tremendous opportunity for better future of company’s financial health and performance. [ CITATION VRa20 \l 1033 ][ CITATION ORe20 \l 1033 ] [ CITATION Eme20 \l 1033 ] Answer of Question no 3 PART 3 Gross profit per unit Lawn master Green machine total Prime cost/unit- add: OH cost/unit- Product cost/unit-         Selling price per unit - less: Product cost/unit- Gross profit/unit-         Gross profit/unit- Divided by: SP/unit- Gross profit margin-         Gross profit/unit- multiply: forecast sales 200,000 25,000 225,000 Total GP/model 14,006,000.00 3,000,750.00 17,006,750.00 Total firm's Gross profit     17,006,750.00   Forecast sales Direct labor hour/unit total DLH Green machine- lawn master- Total     562500 Total OH Total Direct LOH OH rate per direct Labor hour - PART 2 Activity centers Lawn master Green machine total setup 25 50 75 laser cutter- machining- assembly- packing- Activity centers Activity cost Activity level Cost driver/ RATE setup- laser cutter- machining- assembly- packing- Activity centers Cost driver/ RATE Activity level of L.M Allocated cost of L.M Activity level of G.M Allocated cost of G.M setup- laser cutter- machining- assembly- packing- Total allocated cost    -  - Divide by unit produce    -   25000 Overhead cost per unit    -  - PART 3 Activity Based Costing (ABC) techniques should be use to allocate overhead between the two models. Gross profit margin of Lawn master model and Green Machine model are 38.40% and 21.93%, respectively. I would advise to use it because of following pros whereas I am simultaneously describing its disadvantages It provides accurate cost per unit compared to traditional method. It assists the management of the company to control the production cost. It could be relatively costly and time consuming for business than traditional way of costing when Proper cost driver is not selected then this could lead to mismanagement and wrong allocation of cost of production [ CITATION Hor20 \l 1033 ] Answer of Question no 4 Part (A) Material DIRECT MATERIAL PRICE VARIANCE (Sp-Ap) * Actual quantity Comment 65000 Favorable DIRECT MATERIAL QUANTITY VARIANCE (Sq-Aq) * standard price $70 ($70,000) Unfavorable $60 6500 TOTAL DIRECT MATERIAL VARIANCE (SQ*SP)- (AQ*AP) 5500 ($5,000) Unfavorable Material Standard price per meter $70 Actual price per meter $60 Actual quantity in meters 6500 Standard quantity in meters 5500 Part (B) Labor DIRECT LABOUR RATE VARIANCE (SR-AR)*AH ($5,076) Unfavorable 27500 DIRECT LABOUR EFFICIENY VARIANCE (SH-AH)*SR $30 ($21,000) Unfavorable 28200 $30 TOTAL DIRECT LABOUR VARIANCE (SH*SR)-(AH*AR) ($26,076) Unfavorable Labor Standard hour 27500 Standard Rate $30 Actual hour 28200 Actual Rate $30 Part (c) Quantity material variance is favorable because of may be bulk discount. However it can be analyze that company purchases low quality material which results in quantity material variance which subsequently affects the labor effiecny hour. Company can control this by investigating such matter and set a standard for purchase of material purchasing. References 1. Banker, R. D. (2020). Cost management research, 56. 2. Emerald insights. (2020). Managerial finance. 46. 3. Horngren. (2020). Cost Accounting. 180. 4. https://www.accountingtools.com. (2020, September 23rd). Retrieved from Accounting tools: https://www.accountingtools.com/articles/what-is-the-relevant-range.html 5. https://www.investopedia.com. (2020, September 23). Retrieved from Investopedia: https://www.investopedia.com/ask/ answers/042215/whats-difference-between-budgeting-and-financial-forecasting.asp 6. Mary E. Barth, S. U. (2020). Rview. The Accounting Review, 95. 7. O’Reilly. (2020). Accounting principles. 80. 8. V. Rajasekaran, R. L. (2020). Cost Accounting. 110.