BA/BSc Accounting and Finance
Performance Management – Autumn 2014
(PAA304/PA302)
Report for the CEO & Sales Director Of Upnor Ltd
Assessment of current and future role of management accounting and strategic management accounting (by Godwin. Asante & Barnaby. Offei)
Module Leader: Roy Ringham
Lecturer: Matthew O’Hara
Greenwich School Of management
Date for submission: 12am, Friday 28th November, 2014
Student Number
Godwin Asante: 27483
Barnaby Offei: 23835
Table of Contents
⦁ Introduction 3
⦁ Background 3
⦁ Discussion points raised by CEO 3
2.1 A) Break-even point 3
2.2 The Accountant Breakeven Chart 3
2.3 The Economist breakeven chart 4
2.4 B) Fixed cost 5
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The main issues confronted by mangers of organisations such as Upnor Ltd is deciding which approach - the ‘Economist’ or the ‘accountants’ way of analysing cost is more appropriate when doing the sales budget. With this being said it’s hoped this report will be of use during the decision making process.
1.1 BACKGROUND
Cost-Volume-Profit (CVP) analysis often referred to as the “what if analysis” is a managerial accounting technique associated with the volume of sales, the product costs as well as its effects on the operating profit of an entity. It is also said to be a powerful tool in finance - past researchers have justified this statement like Islam et al, 2005 in their journal on accounting techniques for Chinese managers. CVP analysis displays how the operating profit is affected by alterations in the following – “variable costs, fixed costs, selling price per unit and the sales mix of two or more different products” (Drury, 2005). A powerful function of the CVP analysis is the breakeven point, margin of safety and the contribution margin to mention just a few. However the CVP analysis can only be used based on the following assumptions – that is:
⦁ All
The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs.
5. Determine the necessary sales in unit and dollars to break-even or attain desired profit using the break-even formula.
Managerial accounting is essential for decision making. Making the best choice depends on the manager's goals, the anticipated results from each alternative, and the information available when the decision is made (Schneider, 2012). The different techniques associated with managerial accounting are very helpful in the decisions that need to be made. In order to truly understand decision making with managerial accounting one must first discern exactly what managerial accounting means and some of the techniques associated with it. The definition of managerial accounting will be discussed along with the techniques of cost management techniques, budgeting, and quality control.
The breakeven point is used my companies to prevent loss. The Cost Volume Profit (CVP) is the tool in which to capture the breakeven point. Sometimes it is referred to as the breakeven analysis. The CVP assists the company in identifying future operation need, production costs, and expansion possibilities based on estimating costs, prices, and volumes. This profit response can help Competition Bikes determine the amount of needed sales, what products to manufacture, pricing policies, marketing strategies, and how much profit is actually needed. In this analysis we will assume
As upper-level management it is important to understand the key components of cost-volume-profit analysis. Identifying objectives including concepts related to CVP is crucial to the absorption of information.
It helps managers a lot in evaluating future courses of action regarding pricing and the introduction of new services. CVP analysis or Breakeven is used to compute the volume level at which total revenues are equal to the total costs. When total costs and total revenues are equal, the organization is said to be “breaking even”. Managers can utilize P&L statements which are used to project profit or net income. P&L statements can be developed to serve decision making purposes. These can be created for any subunit within an organization, whereas income statements are created only for the overall accounting entity. Break even analysis contains important assumptions and is very essential to the managers to determine whether assumed values can be realistically achieved. Managers can perform CVP analysis to plan future levels of operating activity and provide information about:
The $320,000, on the other hand, is a fixed cost associated with the proposed addition.
Cost-volume-profit (CVP) analysis will help with the mangers make important decisions such as what products and services to give for offer, what prices to charge, what marketing strategy to the farmers, and what cost structure to maintain they have to do.
First, we have identified if there is really an insufficiency in the amount of selling prices set by the Sales Department, in reference to Exhibit 1 of the case. We did this through identifying the maximum amount of overhead costs that the company can incur for the three products and comparing it with the total overhead costs. See Table 1 for details.
Bhimani, A., Horngren, C., Datar, S., Rajan, M. et al. (2012) Management and Cost Accounting. 5th ed. Edinburgh: Prentice Hall, p.369 - 378.
In vertical analysis, it is easier to see elements as a percentage of Revenue. Between 2011-12, the portion that cost of sales takes in revenue has increased however, there is a bigger deterioration in distribution cost. In 2011, 9.21% of revenue remains as profit but in 2012 this figure decreases to 8.14%. Despite reduction in costs is one of the strategies of Ted Baker(part 1.4), analysis illustrates that costs increase each year.
INTRODUCTION Businesses – from manufacturing, merchandising and service industries alike – take careful consideration in the analysis of their costing systems in order to be able to set up competitive prices in the market. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods which Zauner Ornaments have used or is currently using and, in conclusion, be able to distinguish the advantages and disadvantages of each costing method. CASE CONTEXT The case seeks to assist Zauner’s comptroller, Yu Chia-yi, in determining the best costing method for their overhead costs. In addition we also aim to
This makes the company look good and they can afford to do this from good financial skills. Decisions like this make a good profit in the long run and all in all this is why it is so important to have a good management team.
Before performing the CVP analysis for the Hampshire manufacturing firm, we identify two basic cost classifications of interest comprising variable costs and fixed costs. As we analyze the case in study, we need to initially acknowledge that both variable costs per
Unfortunately, not all companies are as benign and have the ability to define all their variables, especially when their product is so diverse and complex. Gupta states, “in virtual enterprises it is important to adopt a costing system based on performance and indentifying critical success factors and tracing the measures and metrics to those factors that would ultimately lead to an improved organizational performance and competitiveness and value” (Gupta , 2005). Simply put, due to companies evolving, their way of measuring their success can be better understood through a CVP analysis. But, due to the complexities and many assumptions created by that analysis, I would have to disagree. Gupta also states, “the cost and performance measures in “New Enterprises” have to focus on delivering value rather than merely trying to establish the historical cost (2005). I find this statement very relevant because historical cost only allows the company to see the beginning and the end, and separates them from the present. Understanding the present and ongoing cost is important in determining value of a product and corporation because it possesses the true and present success.