Project Management Accounting - Budgeting, Tracking, and Reporting Costs and Profitability - Example

Type of Business Carpentry business can be ified in the construction industry and has proved to be viable. Carpentry is diverse ranging from construction of items such as chairs, tables, drawers and office desks to repairs of the same. Carpentry has proved to be a very viable business according to the various feasibility studies that have been carried out. The profit margins for this business are extremely high therefore making it a worthwhile business to venture in. Additionally, due to the increased rise in office construction in urban centers, there is a high demand for office furniture such as chairs, file cabinets and office desks. The carpentry business also entails the renovations of these chairs and office desks together with the wooden fittings that are found in offices. The business aspires to produce office tables, chairs and desks. Cost and selling prices Depending on the nature of the business, the scope of products that we intend to produce and the requirements needed, the business would like to borrow $50 million dollars. The business aspires to produce ten tables, ten chairs and ten office desks every month. The cost price of one table will be $50,000, $10,000 for each chair and $80,000 for each office desk. The production cost for these items seems a bit high since the materials required are not locally available. Therefore, there are lots of costs incurred in ferrying these materials from their natural locality. The intended selling prices are expected to be as follows. Table - $80,000 Chair - $ 20,000 Office desk - $120, 000 The selling prices for the items to be produced is a clear indication that the business can actually be profitable. However, the amount borrowed seems to be high than what is required to meet the production costs of the items to be produced. The demand for these items is sometimes affected by seasonal variations. There are seasons where you find the business is at low peak and not more sales are being made. The machinery need for the production work are also costly together with their maintenance. The maintenance of the office facilities and the buildings also requires a substantial amount so that no operations are halted during the production period. Labour is also another factor to consider since carpentry require specialized and highly skilled personnel in order to produce quality and up to standard products. These skilled people require to be highly paid and motivated for them to perform their work to the satisfactory level. The business therefore must come up with a plan on how to raise the surplus to maintain its operations and keep the business up and running. Competition from other manufacturers also forces the business to be on tenterhooks regarding the need to produce quality products. This helps win the trust of the potential buyers and also helps ward off stiff competition. This goes a long way in ensuring that the business is optimistic of better sales while also maintaining the reputation of the business. Cost structure of the product Item Description Price Timber 25000m. $5/m $ 50,000 Nails 50000kgs. $11/kg $ 550,000 Cardboard 50000m. $8/m $ 400,000 Labour 35,000 p.a/employee $350,000 Total $ 1,350,000 The below outlines the cost structure for the products to be produced by the carpentry business. The units of currency is in form of US Dollars. The cost structure shows the items required for the production work and their description in term of length, quantity and number of manpower. The business requires 25000 meters of timber at a cost of $5 per meter. This translates to $50,000. The high cost of timber is as a result of it’s locally unavailability following strict regulations from the authorities from cutting down trees and destroying the ecosystem. The nails are also required largely for the joining work. Approximately 50000 kilograms of nails are requires trading at $ 11 per kilogram. This translates into $ 550,000 which is high since joining of the timber require high quality nails that are able to withhold the timber in the rightful manner. The business aspires to be the leading high quality manufacturers of these items and therefore it cannot risk to compromise on the quality. Labour also takes up a huge portion of the product cost. With the intention of the business trying to be the leading high quality office furniture manufacturer, the desire for skilled and highly trained personnel is inevitable. The personnel really matters in this business as it revolves around creativity and innovations when it comes to the production of these items. Skilled personnel who can come up with various production designs and ideas are of greater value as far as the business success and continuity is concerned. Ten employees will be required in the production of the product with each being paid $35,000 per annum. This translates into $350, 000. The cost structure for the product with the exclusion of the overhead cost totals to $ 1,350, 000. Method of pricing The method of pricing used is the mark-up pricing strategy which clearly shows the difference between the cost of production of the products and the selling price of the products. Here, the selling price takes into account the fixed costs plus the variable cost in consideration of the market for the selling price. The selling price as obtained through the mark-up pricing strategy is derived or calculated as follow (Callahan, 55). Fixed Cost per unit = Total Fixed Cost / Units Produced Variable Cost per unit = Total Variable Costs / Units Produced Selling Price = Fixed Cost per unit Variable Cost per unit Desired Profit Margin This mark-up pricing method used is preferred as it helps the investors of the profit margin that they intend to make which is above what was incurred during the production of the products. This is clearly shown by the desired margin which shows the amount of profit that the business would like to make above the production cost. First month budget Second Month Budget Estimate Third month Budget Estimate Loan from the Bank $50 million Product cost Timber $50,000 $50,000 $45,000 Nails $550, 000 $500,000 $500,000 Cardboard $ 400, 000 $400,000 $400,000 Labour $ 350,00 $ 350,000 $300,000 $1,350,000 $1,300,000 $1,245, 000 Advertising cost $1541 $1541 $1541 Sales staff $1250 $1250 $1250 Office rent $1041 $1041 $1041 Administration staff $2916 $2916 $2916 Factory rent $2500 $2500 $2500 Machinery maintenance $158 $158 $158 Factory Maintenance $150 $150 $150 Factory utilities $308 $308 $308 $9864 $9864 $9864 The figures in the operational budget are for the first three months indicating the loan to be awarded and the expenditure that the business will incur in production of the products. The business is set to experience low peak at sometimes as far as seasonality is concerned. There are a times when the business will not be producing the products in large scale especially when the demand for the same is low. In times when the season is high and the demand is high, the business will embark on large scale production of the products in order to capitalize on the profit margins that the market can offer. The supply or the rate at which the business will be producing the products is quickly tied to market forces such as demand. When the demand for the product is high, the business will have to increase its production in an effort to meet all the customer needs. When the demand is low, the business has no option but to scale own its production to avoid losses. The product is worth producing since the selling price surpasses the production cost by far. This indicates that the product is profitable and can therefore bring good returns. This is evident from the calculations shown here below. 80,000*10 = 800, 000 20,000*10 = 200, 000 120,000*10=1,200,000 TOTAL = $2, 200, OOO The selling price amounts to $ 2,200,000 compared to the production costs which amounts to $1,350,000. There is a profit of 4850,000. This is clear indication that the business can viable and profitable. Implication of producing management records Producing management records is an important aspect in business set up. This provides new insight and valuable information about the feasibility of a business and its success. It also serves as a projection of the operations of the business in future guiding the investor on the scale of production and the profitability of the business as well (Callahan, 110). It also cautions the investors to be on the lookoutfor market changes and other fluctuations which could have a negative impact on the business. The purpose and use of management accounting information is that it provides the management with sufficient data to determine whether a business will make a loss or profit. Accounting information helps the management during decision making as this will help steer the operations of the business in the right direction (Callahan, 121). Accounting information keeps management alert on the sales trend of the business to avoid future losses. It also helps them take affirmative decisions to curb loss incidences Reference Callahan Kevin R, Stetz Gary S., Brooks Lynne M. (2010).Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability. John Wiley & Sons Read More