Analyzing The Budget And Its Advantages Over The Traditional Cost Accounting Method

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The purpose of this memo is to analyze the budget and highlight any concerns based on our discussion. Activity-based costing was used in the preparation of the budget, its advantages over the traditional cost accounting method will also be discussed. Budget Analysis We have provided you with a cash budget and a segmented income statement. The budget reflects monthly forecasts for all sources of cash receipts and disbursements for the brewery. The segmented analysis outlines the overall profitability of each product line net of tax and amortization. From a cash flow perspective, the brewery is cash positive right from the beginning. This can occur because payment of variable overhead, commissions, transport, and a portion of direct…show more content…
The results from ABC can be used to improve control of overhead while providing valuable information for strategic decisions like pricing and capacity management. ABC was considered throughout the preparation of the budget. We first identified the cost objective as the product line including; Premium Pale Ale, Blonde Lager, Harvest Lager, and Premium Lager. We then identified activities and cost drivers to complement our objective. They were as follows: Activity Driver(s) Sales demand Number of cases sold Brewing materials, machinery, and supervision Direct materials used, Machine hours, Direct labour hours Shipping and logistics Transportation expenses Contract growth Commissions paid General company administration No cost driver (organization-sustaining) Indirect costs that could not be traced back directly to the income statement were then assigned to cost pools by activity. The cost for each activity were then divided by the total volume of the cost driver and assigned to the cost objectives. Ultimately, the use of ABC in its budget processes adds considerable potential benefit to Desert Valley but will be costly to maintain and monitor effectively. We recommend that a CFO be hired on immediately to oversee this process effectively. INTERNAL MEMO TO: Marcus Chelford, Ted Amero, and Fernando Lapan FROM: Li Chan, CPA DATE: October 22, 2014 SUBJECT: Activity 1C – Internal and External Scan The purpose of this memo is to
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