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Cost Analysis ModelsUnit 3 Written AssignmentBUS .docx
- 1. Cost Analysis Models Unit 3: Written Assignment BUS 5110 Managerial Accounting Unit 3 Introduction Cost management is important for all businesses and is used to plan and control the budget. This is done by analysing business practices, predicting expenditures in advance and reducing the chance of over spending in relation to income. Using the client provided data for a business involved in the catering and events industry we can evaluate how productive and effective her business is. Provide an accurate solution. We can see from the data in the attached costing sheet that the
- 2. company has a break even point of 3158 events. To come to this conclusion, we calculated the revenue per event (Current revenue / number of events) $22,500,000 / 5000 = $4,500. We also require our Contribution margin (Revenue per event - Variable cost per event) $4,500 - $2,600 = $1,900. To calculate the Breakeven point, we simply take the Fixed cost and divide that by the Contribution margin = 6,000,000 / 1,900 = 3157.89 Hypothetically, if the company decided they’d like to improve their revenue and increase their profits from $3,500,000 to $5,000,000 we can use the data to calculate the number of events required to reach that target. Using the Units to Achieve a Target Income formula (Total fixed costs + Target income) / Contribution margin per unit = (6,000,000 + 5,000,000) / 1,900 = 5789.47 = 5789 events (Walther, L. M. & Skousen, C.J., 2009). Provide a narrative that defines and discusses the purpose of assigning cost categories of fixed and variable costs. Operating a business incurs a range of costs. These can be defined as either fixed costs which don’t change in relation to activity and variable costs which do. These costing structures will likely differ between businesses and industries. Companies have even been known to use different costing structures between different internal departments. (CFI., n.d.) Many fixed costs are going to be unavoidable and come from the simple operational side of your business. Costs such as depreciation, taxes and rent will likely remain unchanged however other fixed costs such as advertising budgets are more discretionary. Variable costs are also able to be altered depending on the size and scale of your business. For example, order quantities can be increased to bring unit costs down however before committing to such decisions forecasting your sales based on this should also be carried out to ensure you don’t end up grossly overstocked (Walther, L. M. & Skousen, C.J., 2009). In order to maximise profits companies are required to minimise
- 3. or eradicate unnecessary costs any way they can, ideally with no impact on the quality of the final product. A manager must understand both of these categories and the importance they play in the overall running of the business if they’re ever going to effectively improve the business model, reduce costs and remain profitable. Provide a narrative that defines and discusses the relationship of variable costs to contribution margin. Contribution margin is calculated by sales revenues minus variable costs and represents the profit generated for each product or unit sold. This can be measured as a percentage or as a dollar figure. One of the most important factors of contribution margin is that it remains fixed on a per unit basis irrespective of the number of units manufactured or sold. (Investopedia Staff., 2019, February 12) Because only variable costs change based on units of production, fixed costs have no direct impact on contribution margin. Items such as components and materials used for production can be purchased in larger quantities in order to reduce base unit costs and increase the final number of units produced. As these variable costs go down your contribution margin on your final product will increase. (Walther, L. M. & Skousen, C.J., 2009). Provide a narrative that discusses the limitations of the data. As helpful as CVP is to calculate the profitability of a company based on fixed and variable costs, it does have its limitations. Due to the number of data estimations required to calculate, it can lack accuracy and should be considered an approximation instead of a guarantee. For example, CVP assumes that both total costs and total sales are linear however we know that scales of economy can impact costs and large purchases can often lead to a decrease in cost per unit which wouldn’t be represented in this analysis. Another assumption made which can change dramatically depending on external factors is the
- 4. demand for the provided service. Demand can be forecast to some extent however this yet again add another estimation to the analysis which can easily change. (Agarwal, R., 2015, May 13) Provide a narrative that speculates what data is missing from the case. Several other fixed costs pertaining to any business is missing from the provided date. Tax payments are a significant component of fixed costs which should be considered. If taxes aren’t added to the calculation we can only assume the fixed price would rise and our analysis would have to be re-done in order for it to be more accurate. The client data suggests that the tents and other structures as well as trucks and vehicles are only “allocated costs” and not actual costs. Even though these are considered fixed costs, circumstances can change, and these allocated costs may increase or decrease dramatically. For example, a rise in fuel costs will increase the allocated costs of trucks and vehicles. Other missing variables specific to this example include fixed costs office rent and storage costs as well as the variable cost of utilities. All of which should be recorded and added to your costing plan. Without these added into your CVP it will give an inaccurate representation of your breakeven point and you could end up losing money. References: Agarwal, R. (2015, May 13). Cost-Volume Profit (CVP): Definition and Limitations. Retrieved from http://www.yourarticlelibrary.com/accounting/costing/cost- volume-profit-cvp-definition-and-limitations/52670 CFI. (n.d.). Cost Structure - Learn About Cost Allocation, Fixed & Variable Costs. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finan ce/cost-structure/ Investopedia Staff. (2019, February 12). Contribution Margin.
- 5. Retrieved from https://www.investopedia.com/terms/c/contributionmargin.asp Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting. Bookboon.com ECO 201 Milestone Three Guidelines and Rubric The purpose of this milestone is for students to explore the various costs their firm faces and to describe their firm’s market. Using the concepts and tools developed in Modules Four and Five, students will analyze the fixed and variable costs of their firm, how those costs have changed over time, and how those changes have impacted their firm’s overall health and sustainability. In analyzing their firm’s market, students will detail the extent of their firm’s market power and their firm’s ability to influence the market. Students will also describe major trends in the market, specifically concerning new products, technologies, and new entrants. Students can further determine the future health of their firm to inform their final recommendations by examining their firm’s place within the market. Prompt: Submit a draft of the Costs of Production (Section IV), Overall Market (Section V), and Recommendation (Section VI) of your research paper, including all critical elements listed below. You will review your firm’s financial reports and other relevant data sources to collect and analyze cost information for your firm over the past five or so years. Using real data and the economic tools developed in Module Four, you will analyze your firm’s
- 6. profitability and how costs impact its growth. Additionally, you will find data on your firm’s competitors in order to detail your firm’s place within the market currently and over the past five or so years. Lastly, you will develop a recommendation for how the firm can manage its future production. Specifically the following critical elements must be addressed: IV. Examine the costs of production for your firm. a) Analyze the various costs a firm faces, their trends over time, and how they have impacted your firm’s profitability. b) Apply the concepts of variable and fixed costs to your firm for informing its output decisions. For instance, analyze how different kinds of costs (labor, research and development, raw materials) affect the firm’s level of output. V. Explore the overall market for your firm. a) Discuss the market share of the firm and its top competitors by providing details on current percentages for each firm and describing the trend over time. You might consider presenting the data graphically. b) Analyze the barriers to entry in this market to illustrate the potential for new competition and its impact on your firm’s future in the market. c) Describe the market structure for this firm and analyze how this affects the firm’s ability to influence the market. VI. Recommendation
- 7. a) Develop a recommendation for how the firm can manage its future production by synthesizing the data presented. b) Suggest how the firm’s position within the market and among its competitors will allow it to take your recommended action. c) Describe how the firm can sustain its success going forward by evaluating the findings from demand trends and price elasticity. Rubric Guidelines for Submission: Your paper must be submitted as a three- to six-page Microsoft Word document (each section should be one to two pages) with double spacing, 12-point Times New Roman font, one-inch margins, and sources cited in APA format. Critical Elements Proficient (100%) Needs Improvement (75%) Not Evident (0%) Value Costs of Production: Profitability Analyzes the various costs a firm faces, their trends over time, and how they have impacted the firm’s profitability Analyzes the various costs a firm faces, and their trends over time, but does not discuss how they have impacted the firm’s profitability
- 8. Does not analyze the various costs a firm faces, their trends over time, or how they have impacted the firm’s profitability 12 Costs of Production: Output Decisions Accurately applies the concepts of variable and fixed costs to the firm for informing its output decisions Applies the concepts of variable and fixed costs to the firm for informing its output decisions, but applies concepts inaccurately Does not apply the concepts of variable and fixed costs to the firm for informing its output decisions 12 Overall Market: Market Share Discusses the market share of the firm and its top competitors by providing details on current percentages for each firm and describing the trend over time
- 9. Discusses the market share of the firm and its top competitors, but does not provide details on current percentages for each firm or does not describe the trend over time Does not discuss the market share of the firm and its top competitors 12 Overall Market: Barriers to Entry Analyzes the barriers to entry in this market to illustrate the potential for new competition and its impact on the firm’s future in the market Analyzes the barriers to entry in this market, but does not illustrate the potential for new competition or its impact on the firm’s future in the market Does not analyze the barriers to entry in this market 12 Overall Market: Market Structure
- 10. Describes the market structure for this firm and accurately analyzes how this affects the firm’s ability to influence the market Describes the market structure for this firm, but does not analyze how this affects the firm’s ability to influence the market or analysis is inaccurate Does not describe the market structure for this firm 12 Recommendation: Future Production Effectively develops a recommendation for how the firm can manage its future production by synthesizing the data presented Develops a recommendation for how the firm can manage its future production, but recommendation is not effective or is not based on a synthesis of the data presented Does not develop a recommendation 12 Recommendation: Recommended Action Suggests how the firm’s position
- 11. within the market and among its competitors will allow it to take the recommended action Suggests how the firm’s position within the market and among its competitors will allow it to take the recommended action, but suggestions are not appropriate Does not suggest how the firm’s position within the market and among its competitors will allow it to take the recommended action 12 Recommendation: Sustain its Success Describes how the firm can sustain its success going forward by evaluating the findings from demand trends and price elasticity Describes how the firm can sustain its success going forward, but does not evaluate the findings from demand trends and price elasticity in the discussion Does not describe how the firm can sustain its success going forward
- 12. 12 Articulation of Response Submission has no major errors related to citations, grammar, spelling, syntax, or organization Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas 4 Earned Total 100%