Managerial Accounting: Wendy Burgers and Burger King Burgers - Essay Example

Supervisor: May 18, Managerial accounting final report Introduction and background information The current competitive corporate environment requires informed decision making to ensure an organization’s competitive advantage and relevance in a market. Information such as amount of resources that are necessary for production and the rate at which they can be absorbed is for example instrumental to ensuring continuous production besides efficient determination and allocation of costs. Efficient costing also helps organizations to set competitive prices that can also allow for sustainable profit margins and managerial accounting plays an important role in offering necessary information to managements and facilitating the managements’ application of accounting information in making decisions. This paper offers managerial accounting report based on an entity’s costing accounting data and recommends improvements to the firm. The scope of management accounting incorporates financial accounting concepts, cost accounting concepts, and statistical concepts to develop an understanding of a business environment towards informed managerial decisions. Cost accounting offers data on costs and facilitates analysis for cost control or cost based decisions (Bhattacharyya 2). The management approach’s ability to use existing data for forecasting and planning identifies its significance to management because it aids strategy developments for market dynamism (Mitra 1-27). Incorporation of statistical tools in the management approach also empowers it to determine informed choices for efficient operations because the techniques allows managements to compare environmental factors in a market and to identify the most suitable applications that can guarantee market control and efficient and effective operational processes. The report relies on these aspects to review the firm’s cost and processes (Thukaram 5). Problem statement While rich literature offers theories for application of managerial accounting in business scopes, implementation of the theories and associated concepts of managerial accounting relies on a manager’s potentials to understand involved business environment and incorporate necessary managerial accounting concepts. This paper applies a case study to demonstrate application of managerial accounting concepts in resolving problems. The report is based on SSI case study. The firm is a meat, burger, and chicken processing plant in Idaho, United States. Its executive group has learnt that their leading clients are not satisfied with the firm’s pricing and they are considering contacts with SSI’s competitors, arguing that the firm’s prices are too high. Other clients are however happy with the organization because it offers the cheapest prices in the locality. This controversy in opinion among clients identifies pricing as a problem that should be explored for possible reconciliation with the discontent clients. The problem identifies the need to explore following research questions. What are the recommended cost savings that will help SSI increase its profits? Is the organization pricing its products efficiently? Method The report is based on a case study on SSI firm that offers six distinct products to six different clients. Data was collected from published information on the organization’s accounting and managerial records regarding involved production activities and their costs. The data was then analyzed, objectively, to understand the firms costing and pricing. Results The organization produces six types of meats for retail sales. It operates two sessions per day with each session lasting for eight hours and pays direct labor costs per hour. The operations involve six different set ups per day. Each set up produces each product and clean up and adjustments for each product specification precede each set up. The following table summarizes SSI’s daily schedule for the production and set up processes in their order of production. Table 1: Daily schedule for SSI’s productions Item Time Product 1 4 Wendy burgers 2 0.5 setup for next job 3 1.5 Taco Bell burger equivalent (ground beef, not burger patty) 4 0.5 setup for next job 5 1 Chicken patties 6 0.5 setup for next job 7 4 hours Burger King burgers 8 0.5 setup for next job 9 1.5 frozen meat patties for Albertsons grocery store 10 0.5 setup for next job 11 1 frozen meat patties for public grade school lunches 12 0.5 setup for the next job The four-hour production activities for Wendy burgers and Burger King Burgers use similar materials in meat and patty sizes with the only difference realized in packaging. Reorganizing the schedule to run the two activities consecutively would therefore reduce the set up time between them to five minutes. The firm operates 300 days per year. Its direct labor cost, including fringe benefits, is $ 12 per hour and it operates two-eight-hour shift per day with 20 direct labor workers per shift. Direct labor materials include meat and packaging and each 1-hour job batch generates 4000 burgers. The beef burgers and patties cost $ 0.20 per unit while the chicken patties cost $ 0.15 per unit. The table bellow summarizes the firm’s estimated factory overhead cost Table 2: Estimated factory overhead cost Item Cost Indirect Labor $ 30000 Indirect materials $ 10000 Depreciation $150000 Taxes, Insurance, utility Costs, including labor for Setup expenses $ 130000 Total $ 390000 Discussion Retrieved data from the firm’s cost accounting records facilitates the following computations that aid exploration of the problem and solution to the research questions. Predetermined overhead rate With factory overhead charged on direct labor hours, the predetermined overhead rate is derived as follows. Direct materials, direct labor and factory overhead costs for the six products The direct labor costs, direct materials costs and overhead costs for the six products are summarized in the following table, with detailed computations in the appendix section. Table 3: Direct labor costs, direct materials costs and overhead costs for the six products Product Direct labor cost Direct materials cost Overhead cost Wendy Burgers 288000 960000 120000 Taco Bell Burger 108000 360000 45000 Chicken patties 72000 180000 30000 Burger King Burger 288000 960000 120000 Frozen meat patties for Albertsons Grocery store 108000 360000 45000 Frozen meat patties for public grade school lunches 72000 240000 30000 Total 936000 3060000 390000 Average cost per burger or patty for each of the six products The average cost per burger or patty was determined from the total costs and total number of products and are summarized in the following table. Table 4: Average cost per burger or patty Product Total cost Average cost Wendy Burgers 1368000 0.2850 Taco Bell Burger 513000 0.2850 Chicken patties 282000 0.2350 Burger King Burger 1368000 0.2850 Frozen meat patties for Albertsons Grocery store 513000 0.2850 Frozen meat patties for public grade school lunches 342000 0.2850 Total 4386000 Gross profit per product The organization’s model adds 30 percent to unit cost in order to determine its selling price and the following table summarizes calculated gross profit for each of the six products. Table 5: Gross profit per product Product Sales Cost Gross profit Wendy Burgers 1778400 1368000 410400 Taco Bell Burger 666900 513000 153900 Chicken patties 366600 282000 84600 Burger King Burger 1778400 1368000 410400 Frozen meat patties for Albertsons Grocery store 666900 513000 153900 Frozen meat patties for public grade school lunches 444600 342000 102600 Total 5701800 4386000 1315800 Recommendations The production schedule identify waste in set up time because set up between production of Wendy Burger and Burger King Burger are the same and producing the two products consecutively would reduce daily set up time and associated direct labor cost that is charged by time. The study therefore recommend that SSI reschedule its production program to have Wendy’s Burger and Burger King Burger produced consecutively. This will lead to an overal shrink time by 25 minutes and a consequent change in average overhead cost for the two products. The change will save a total of 125 labour hours per year. This will also reduce the average set up time for Wendy burger and Burger King Burger from 30 minutes per day to 17.5 minutes per day. The proposed schedule results in the following costing rates. Table 6: Overhead rates for recommended schedule Product Set up time for each product DL hours Activity based overhead rates Wendy Burgers 18 5250 87.5 Burger King Burger 18 5250 87.5 Taco Bell Burger 30 9000 150 Chicken patties 30 9000 150 Frozen meat patties for Albertsons Grocery store 30 9000 150 Frozen meat patties for public grade school lunches 30 9000 150 Total 155 46500 775 The table bellow shows the resultant cost and revenues. Table 7: Cost and revenue under recommended schedule Product Direct labor cost Direct materials Overhead cost Total cost Average cost per burger Sales price Sales Costs Wendy Burgers 288000 960000 94677 1342677 0.2797 0.3636 1745481 1342677 Taco Bell Burger 108000 360000 55161 523161 0.2906 0.3778 680110 523161 Chicken patties 72000 180000 45161 297161 0.2472 0.3219 836310 297161 Burger King Burger 288000 960000 94677 1342677 0.2797 0.3636 1745481 1342677 Frozen meat patties for Albertsons Grocery store 108000 360000 55161 523161 0.2906 0.3778 680110 523161 Frozen meat patties for public grade school lunches 72000 240000 45161 357161 0.2976 0.3869 464310 357161 Total 936000 3060000 390000 4386000 5701800 4386000 This identifies a $ 1315800 gross profit. The study also recomends a review of the products’ prices based on costs from the new schedule model. The new model identifies lower product cost for Wendy Burgers and Burger King Burgers but higher costs for the other products. This leads to lower sales prices for Wendy Burgers and Burger King Burgers and higher sales prices for the other products. The following table summarises average cost and prices before and aftre changed schedule. Table 8: Products’ costs and prices before and after schedule change Conclusion A review of the firm’s costs and activity schedule identifies schedule planning inefficiency that leads to waste in set up time and poor overhead cost allocation. The firm should therefore change its production schedule to produce Wendy burgers and Burger King Burgers consecutively. The current pricing is also inefficient because it overcharges Wendy burgers and Burger King Burgers but undercharges the other products. A comparison of costs and prices before and after the proposed change shows this. The current opinion among the four minor clients that their products’ prices are the cheapest among suppliers and yet Wendy burgers and Burger King Burgers identify better prices among other suppliers supports this position. Changing the production schedule and using activity based costing to review its prices will therefore help the organization to retain its two main clients and at the same time satisfy its other clients. Works Cited Bhattacharyya, Debarshi. Management Accounting. New Delhi: Pearson Education India, 2011. Print. Mitra, K. Advanced Cost Accounting. New Delhi: New Age International, 2009. Print. Thukaram, Rao. Management Accounting. New Delhi: New Age International, 2007. Print. Appendices Appendix 1 - Details calculations of direct labor and direct materials costs Appendix 2 - The assignment of activity cost pools to products Read More