Executive Summary: The Fly Ash Brick Project Case highlights a project idea between two potential business partners Rajiv Sharma and Alok Gupta. Rajiv has had a business idea for a long time regarding the manufacturing of Fly Ash Bricks, a construction material made up of recycled coal residue and three other materials (Gypsum, Lime, and Sand). He has been doing market research on the feasibility for this venture, and as an important step of the process, he must calculate the financial risk and potential of this business plan. He is relying on a cost-volume-profit (CVP) analysis to determine if this project is a reality for him financially.
(Note - All values are in Indian Rupees - Rs.) 1. Analyze the various expenses into fixed
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These are costs that he will have to cover each month regardless of how many bricks the company is making or selling. They need to be budgeted for from the first month when they are just starting out, all the way through the life of the company.
Monthly Expenses – Fixed Cost, Admin Cost, Manufacturing Overhead
Building rent (FC)
50,000
Administrative Cost (AC)
10,000
Office Supply (MO)
5,000
Electricity (for lighting) (MO)
10,000
Miscellaneous (MO)
20,000
TOTAL
95,000
Variable expenses
Manufacturing companies almost always incur variable expenses. A big reason why is because to make products, you need raw materials. In this case we have Fly Ash (250,000), Gypsum (250,000), Lime (300,000) and Sand (40,000). Another variable expense will be Workers Labor (100,000) and Drivers (25,000). The workers will be working varying hours depending upon the production need. During busy times they might be working overtime, while in down times they could very well be asked to not come in for a day. This is all under the assumption that they are paid hourly and not on salary. If they were salaried it would be considered a fixed cost. The same goes with the drivers. They will be delivering the products on a demand basis. More trips when the company is busy and less when production is slow.
Relevant Costs, Insurance, Fuel, Oil Lubricants, Tolls, Parts and Small Tools, Hourly wages: Drivers, Trailer Pool Expense
2. What is the total cost? How much of the total cost are labor costs? Capital costs?
As for cost structures for this industry, the fixed costs are going to consist of machinery and equipment in order to produce the automobiles. These fixed costs also serve as a barrier of entry into the industry; small firms will not be able to afford the fixed costs. For the variable costs, labor, materials, and advertising are going to be the main costs (Investopedia, 2009). These costs also change according to the output produced; whether the companies cut back on production or increase in production. These costs don’t serve so much as a barrier of entry into the industry, but in order to compete in this industry, an entering firm must come up with them on an extremely large scale.
OPERATING EXPENSES 57500 Freight 4,302,951.46 1.79% 4,236,263.09 1.84% (66,688.37) -1.55% 60000 Advertising Expense 897,140.01 0.37% 986,854.01 0.43% 89,714.00 10.00% 61000 Auto Expenses 208,974.39 0.09% 214,502.80 0.09% 5,528.41 2.65% 62000 Research & Development 31,212,334.17 12.97% 543,870.44 0.09% (30,668,463.73) -98.26% 64000 Depreciation Expense 133,000.00 0.06% 446,000.00 0.19% 313,000.00 235.34% 64500 Warehouse Salaries
Wilkerson employs a Normal Cost System, which means that they use predetermined overhead rates along with actual costs for direct material and direct labor. Normal costing systems are appropriate when overhead costs are a relatively small percentage of total manufacturing costs and product diversity is limited. For Wilkerson, normal costing does not make sense. Overhead costs make up over 50 percent of total manufacturing costs and their product offering is relatively more diverse. This indicates that the current accounting system in place may be distorting costs significantly. Supporting data:
The wages of general production employees who are idled due to machine breakdown are classified as indirect costs. Direct costs are usually variable and change as production volumes change. Thus, direct materials and direct labor are typically variable costs. For special orders, some direct costs can be fixed, however. The costs (depreciation, electricity, and routine maintenance) associated with a machine dedicated to one product are direct costs of that product. Indirect costs cannot be easily and conveniently assigned to a special order. Rather, these costs are common costs, in that they are incurred to produce a variety of special orders. Maintenance costs of general purpose equipment, the supervisor’s salary, and utilities are direct costs needed to produce special orders in general, but are indirect costs for a particular special order. Moreover, general production costs, including property taxes, insurance, lawn care, cafeteria costs, and miscellaneous supplies consumed in production are indirect costs properly allocated to special orders manufactured.
uses budgeted fleet hours to allocate variable manufacturing overhead. The following information pertains to the company 's manufacturing overhead data:
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
Manufacturing overhead Rent on production equipment........ $ 6,000 Insurance on factory building ....... 1,500 Depreciation on factory building............................................ 1,500 Utility costs—factory........................ 900 Property taxes on factory building............................................ 400 Miscellaneous expenses— factory .............................................. 1,000 Total manufacturing costs..................... Total cost of work in process ...............
1. Bob Moyer provided us with his 2004 production budget and production costs. The production budget can be viewed as his master/static budget based on his predicted production of 10,000 bicycles. The production costs he provided us with represent the actual budget based on the 10,800 bicycles produced (Exhibit
A variable cost is a corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases (Variable Cost, n.d.); in the case study for all cost per event such
1. Introduction 2. Analysis of current position 3. Analysis of new project 3.1 Methodologies and processes of Valuation 3.2 processes of Valuation 4. Conclusion
3 variable costs indentified, they are power, operations, material. They are proportional to the revenue intake.
The current method of apportioning production overheads based on direct labour hours can be described as a traditional approach to product costing. In a manufacturing company’s financial statements, each item produced must be allocated some of the production overheads to make the statements compliant. Sometimes the individual costs of these items can be calculated incorrectly based on overall production overhead and the system of allocating in place, however the overall financial statement can still be accurate. This traditional method of allocating the production
Under the new cost system, two broad sources of costs were identified: manufacturing and SM&A. All costs within these categories were reclassified as either volume driven or order driven. Hence, four cost pools were set up.