Adjustments to the final accounts of business organisations 12
Management Accounting Report for Water Play, Inc
1. Management Accounting Report
Brent Caron
Joey Decicio
Bridget MacCallum
Damian Rivelli
Francisco Vela
BAD 2 – Section 4261
Barbara Croteau
3/12/15
Water Play, Inc.
2. Table of Contents
Table of Contents...........................................................................................................2
Introduction....................................................................................................................3
Identifying Cost Categories..........................................................................................3
Bill of Materials.........................................................................................................................................3
Labor Routing and Costs schedule.........................................................................................................4
Manufacturing Overhead Budget...........................................................................................................4
Selling and General Administrative Expenses......................................................................................5
Discretionary Costs...................................................................................................................................5
Consolidated Income statement .................................................................................6
Break-even Point.......................................................................................................................................6
Operating Leverage..................................................................................................................................7
Margin of Safety........................................................................................................................................7
Comments on Projected Financial Performance.......................................................8
Appendices......................................................................................................................9
A-1 Bill of Materials..................................................................................................................................9
A-2 Labor Routing and Costs..................................................................................................................9
A-3a Manufacturing Overhead Budget................................................................................................10
A-3b Manufacturing Overhead Budget Categorized by Cost...........................................................10
A-4a Selling and Administrative Expense...........................................................................................11
A-4b Selling and Administrative Expense Categorized by Cost......................................................12
A-5a Contribution Income Statement...................................................................................................12
A-5b Contribution Income Statement Pie Chart.................................................................................13
A-6 Break-even point, Operating Leverage, and Margin of Safety Calculations............................13
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3. Introduction
The analysis in this report focuses on the management reports and accounts that
provide accurate and timely financial and statistical information that aid manager’s
decision making for start-up company, Water Play, Inc. This report will identify the
different types of costs for the annual budget period, as well as a prepared contribution
format income statement, which will show the amount available to cover fixed cost and
generate a profit. In addition, break-even point, operating leverage ratio, and margin of
safety will be calculated and analyzed. Next, two full set of budgeted financial
statements for the first year of operations such as the income statement, statement of
retained earnings, balance sheet, as well as a cash budget will be prepared by using
forecasted unit sales, which will reveal potential strengths and weaknesses that will be
analyzed. Lastly, these budgeted financial statements will be compared and analyzed to
the actual financial statements, using the actual data for the first two quarters;
variances.
Identifying Cost Categories
Bill of Materials
All the materials in the Bill of Materials document, refer to Appendix A-1, are
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4. considered variable costs. Variable costs are those costs that vary depending on a
company's production volume; they rise as production increases and fall as production
decreases. They are also considered to be direct costs, which can be completely
attributed to the production of specific goods or services. Lastly, all the materials are
considered to be product costs, which are the direct materials, direct labor, and
manufacturing overhead used in making its products in manufacturing companies,
because everything listed are direct materials used to create the Shark Scout Vehicle.
Labor Routing and Costs schedule
All of the costs in the Labor Routing and Costs schedule, refer to Appendix A-2,
are considered to be variable costs since the amount of hours to assemble the shark
scout vehicle vary by how much the company decides to sell. These costs are also direct
and product costs, because these hours are refer ton as direct labor towards the
manufacturing of the product.
Manufacturing Overhead Budget
The costs in the Manufacturing overhead budget, refer to Appendix A-3a, are
both fixed and variable costs. Fixed costs are costs that do not change with an increase
or decrease in the amount of goods or services produced these costs are essentially
expenses that have to be paid by a company, independent of any business activity.
These costs are also both period and product costs. Period costs are non-manufacturing
costs not included as part of the cost of purchased goods nor manufactured goods.
These costs are also expensed straight to the income statement in the period in which
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5. they are incurred. Lastly, they are both direct and indirect costs. Indirect costs are
Indirect costs are costs that cannot be accurately attributed to specific cost objects. Refer
to Appendix A-3b pertaining to the different cost categories in the Manufacturing
Overhead Budget.
Selling and General Administrative Expenses
The costs in the Selling and General Administrative Expenses, refer to Appendix
A-4a, are considered to be both fixed and variable costs. Every cost is also categorized
as a period costs, since these costs are not incurred in the manufacturing process. Also
for this reason, they are categorized as indirect costs. Refer to Appendix A-4b pertaining
to the different cost categories in the Selling and General Administrative Expenses.
Discretionary Costs
Discretionary costs are costs that management has decided that can be reduced
in the short term. Advertising, as per a company decision, is a discretionary cost
because the company can decide how much they would like to spend on promoting the
company. Training, which is also up to the company, would be a discretionary cost
because management makes the decision on how much time they want to train their
employees. Fringe benefits are up to management because they make the decision to
provide benefits such as health insurance plans, retirement plans, and hospitalization
plans. As for research and development it would be considered a discretionary cost
because management also decides how much they would like to spend on research in
order to build their company. The management team of this company has decided that
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6. for this year, none of these costs fit under the discretionary cost category due to it being
a startup company. The company has no discretionary costs right now because all of the
costs that would typically be discretionary such as advertising, training, fringe benefits,
research and development, and sales office supplies will be utilized as committed costs
to ensure the company’s growth for this first year.
Consolidated Income statement
A predicted contribution format income statement has been prepared based on
an expected production of 72,000 units annually, with a retail price of $24,000 per unit.
A contribution format income statement is a statement in which all variable expenses
are deducted from sales to arrive at a contribution margin, from which all fixed
expenses are then subtracted to arrive at the net profit or loss for the period. This is an
excellent form of presentation, because the contribution margin clearly shows the
amount available to cover fixed costs and generate a profit (or loss). Refer to to
Appendix 5a to view the contribution format income statement and refer to to
Appendix 5b to view a visual of how much variable expenses and fixed expenses are
deducted from sales to come up with a net income.
Break-even Point
The break-even point for the company is at 49,023 units produced, which come
out to $1,176,552,598 sales dollars. Break-even point is the point of balance between
making either a profit or a loss. To find the volume of units to break-even, total fixed
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7. expenses is divided by the contribution margin per unit. To find the sales volume at
break-even, total fixed expenses is divided by the contribution margin percent
(percentage of the sales price). Refer to appendix A-6 for these calculations. If the
company manages to sell the predicted 72,000 units in this next year, it will have made a
profit of $217,546,000. We trust in our data collection team that these numbers are not
fictional, but they are very well attainable.
Operating Leverage
The current Operating Leverage, which measures the correlation between net
operating income to a given percent change in sales, of 3.13 is a low degree, making it
less responsive to a change in sales. Refer to Appendix A-6 for calculations. This means
that the fixed cost is comparatively low to the Sales. With a low Operating Leverage,
there is a lower increase in Revenue because they have to increase those costs
proportionally to make those sales.
Margin of Safety
The current Margin of Safety in dollars is $551, 447, 401.77, which calculates the
“cushion” of sales before the break-even point will be reached if sales decrease. Refer to
Appendix A-6 for calculations. This means that Water Play, Inc. is healthy and has a
safe amount of profitable sales that will cover all of the fixed and variable costs. The
current Margin of Safety in percent shows that 31.9% of sales are profitable appearing
as a positive net operating income.
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8. Comments on Projected Financial Performance
Management should note that the projected financial performance of the
company is durable and profitable with the current cost structure because of the Low
Fixed Cost Structure. This Low fixed Cost Structure means that the Break Even Point is
low, while the Margin of Safety is high; the Operating Leverage is low, which results in
a lower risk with a large cushion of safety in case sales decrease.
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