HI I finished all this report just need to rewrite to make it fit
into few pages Its way to long and way to much extra information.
Can somebody help me and make it bit small. Thats all in need. Thank you
Superior Manufacturing Company produces three different industrial products which they sell to companies for use in the processes of other manufacturers. Upon the former president's untimely death in 2004, the new president, Paul Harvey, took over. Due to managerial inexperience, the company experienced poor management decisions and morale of the employees decreased. Financial reports showed a net loss of $688,000. As a result, Harvey hired Herbert Waters, and experienced executive, to help turn the company around.
ORIGINAL 2004 SIMPLE COST SYSTEM
Superior Manufacturing Company three products are 101, 102, and 103. When Herbert Waters started working at Superior Manufacturing; their market share was 12% for product 101, 8% for product 102, and 10% for product 103. Each product utilizes a simple cost system in which each product identified directly with specific direct costs and indirect costs as seen below in Figure 1. All products are sold in 100 pound bags, therefore per unit costs are expressed in terms of 100 pounds of finished product. All direct costs are assigned directly to the product factory for which they were incurred. Indirect costs were allocated using various allocation bases.
Figure 1: 2004 Contribution Margin Analysis
When Waters took over in 2005 he introduced a standard cost system. Costs were assigned based on historical costs, adjusted for projected changes.
DISCONTINUING PRODUCT 103
One of the two main decisions that Harvey and Waters must address is whether or not to discontinue the production of product 103. As seen in Figure 1, product 103 was the least profitable in 2004 with a net operating loss of $2,211,000. Harvey's ideal solution is to cease production, while Water's would like to continue producing product 103. Harvey's solution would result in lost revenues and no variable costs related to product 103. This means that product 101 and 102 must absorb all the fixed costs associated with 103. Figure 2 below shows the result of Harvey's solution is an additional decrease in the net operating loss in the amount of $1,326,000.
Figure 2: Product 103 Contribution Analysis: Continue vs. Discontinue Manufacturing (in thousands)
Superior Manufacturing also operates below capacity within each factory, meaning that dropping product 103 would be the less profitable decision. Figure 2 shows that Superior Manufacturing would increase the company's losses and decrease future profits if they follow Harvey's recommendation.
REDUCING THE PRICE ON PRODUCT 101
The second decision that Harvey and Waters address is whether or not to reduce the price of product 101 in 2006. According to the case study, "the dominant company in the market area was the Samra Company, which operated as the largest manufacturer within the market". In November 2005, Samra announced that they would be reducing the market price on product 101. Superior Manufacturing must decide whether or not to follow suit. Waters argument is that if Superior continues at the price of $24.50, sales are projected to be 750,000 units, while meeting the market price of $22.50, sales are projected at 1,000,000 units.
To support the current pricing strategy of product 101, Harvey and Waters need to analyze what the potential profit or loss would be with each production level. Figure 3 below shows the detailed comparison for each level. Fixed costs remain at a total of $12,321,000, while the contribution margin will change relatively from $13.95, associated with the sales price of $24.50, to $11.97, associated with the sales price of $22.50. The decrease in contribution margin is directly related to the reduction in sales price and an estimated 5% reduction in materials and supplies. Each level will show a net loss; however, the increase in unit sales counteracts the loss when the product is priced at $22.50.
Figure 3: Product 101 Price Comparison (in thousands)
It would be in Superior Manufacturing's best interest to lower the price of product 101 to match the new market price of $22.50. The profit analysis in Figure 4 represents the breakeven point that Superior Manufacturing requires to prevent a continued net loss in the future. While the breakeven price is 90 cent less than the new market price, it would not be ideal in the long run to undercut the new market price as the demand is extremely elastic. Given the market share at its current state, Samra Company would be the only manufacturer in the area that has the capacity to absorb the short run loss associated with price undercutting.
Figure 4: Product 101 Profit Analysis
PROFITABILITY IN THE FIRST HALF OF 2005
In 2005, Waters introduced a standard cost system that assigned costs based on historical averages with adjustments for future anticipated changes. At the midpoint of 2005, Water's used the data from the accounting department to analyze the company's total variances of actual costs from standard costs. As seen below in Figure 5, the total overall variance is favorable; however, after analyzing each individual favorable variance the favorable variance is due to an over allocation of the costs. For example, the Rent fixed cost below shows a favorable cost of 259; however, this favorable cost is only due to the . It can be determined that the allocations bases used by management are not efficient. The favorable variances associated with fixed costs are favorable because they are treated as though they behave like variable costs.
An increase in unit sales in 2005 created a favorable variance when compared to the standard unit sales. Actual unit sales were higher than the standard unit sales projected. Rent is shown below with a favorable variance; however, this variance is favorable only because actual unit sales were higher than anticipated. Indirect labor shown below is favorable; however, this cost is a floating variable that at times is treated as a non-variable cost that allows management to change at any given time. This cost should not be considered a fixed cost due to the mere fact that the labor is not fixed at any given point. Depreciation variance shown below is favorable; however, this cost should have not provided a favorable variance due to the fact that it was not based on an allocation that allowed for a variable response.
Figure 5: Total Standard vs. Total Actual Costs with Variances
Figure 5 illustrates the results of the first half of 2005 sales with total standard costs compared to actual costs.
Overall, the established rates used by Superior Manufacturing are too high when allocating costs to the following three cost pools: rent, indirect labor, and depreciation. Figure 6 focuses on the variances in question with percentages.
Figure 6: Items with high variances
Comparing 2004's sales to the interim-period of 2005's sales to see that Superior sold a higher volume of units of product 102 and 103 than budgeted. The increase in sales volume contributed to the overallocation of the specified indirect costs.
The information from Exhibit 4 was determined that Superior Manufacturing has a long road ahead of them. The allocation bases could be improved. Comparing standard and actual costs for each item, not just company totals, would allow Waters and Harvey to see how and why certain indirect costs are being overallocated. In order to see why certain items are being overallocated, we would need
IMPORTANCE OF AN EFFECTIVE COST SYSTEM
Superior Manufacturing needs an effective cost system to turn the net loss to a net profit. The economic downturn of the industry requires management to take a closer look at all current product costs, fixed costs in particular, to see how Superior can reduce unfavorable variances in the flex budget. To maintain their market share, Superior Manufacturing must reduce costs related to product 103 to reduce the overall loss associated with the product and be confident in a pricing strategy for product 101. The current cost system utilized is not serving the management team in a way that allows them to make the best decisions for the future of the company. While the current cost system uses relatable allocation bases to assign costs to each product, it assigns costs to the product costs that could be better served as period costs.
The consolidated profit and loss statement is helpful by showing where the largest indirect costs are and their net effect. While net income is always the goal of a company, it is important to know why the company is operating at a profit or loss. Continual analysis of the product costs is necessary for management to know how to increase the profitability, or decrease the loss, of Superior Manufacturing. The analysis of profit and loss by product and department shows high indirect product costs and their respective allocation bases. It is helpful to see costs what each product line's factory is incurring, however it is very busy and could be rearranged to highlight the contribution margin of each product. Having the report flow that way would allow management to see what the indirect costs are having a higher impact on the net income and make decisions to try to reduce or move the costs from product to period. The final report given is the variance report. While we do see favorable variances that indicate an increase in profitability, the report is vague. It is unclear what is driving the highest favorable variance from the information given and presented. Management could use the actual figures for each product as opposed to total actuals to further determine why some of the variances are so high. If the management team is able to determine the cause if the variance, if the variances are accurate, and how to decrease indirect product costs, either through a change in allocation rates or moving to period costs.
Superior Manufacturing's management team, including Waters, should reorganize the profit and loss statement related to each product line to reflect a contribution margin. The report should continue to include the allocation base of the product costs that are categorized as indirect. This will allow them to re-evaluate the cost accounting system, including the allocation of indirect costs. When using the variance report, it is important to remember that the net income is number one concern of Superior Manufacturing. This report should be reconfigured to show the standards and actuals of each product line, to allow management a better understanding of what product is affecting overall profitability. These small, yet significant, changes in reporting will help Waters illustrate to Harvey the importance of retaining production of product 103 and adopting the market pricing strategy of product 101. These management decisions will lead the future profitability of Superior Manufacturing through an increase in unit sales volume.