Management Accounting - Business Plan Example

MODULE I A brief mission ment for the company. A company that aims to survive and thrive for the long-term starts its operations by planning,which is initially done by crafting a business strategy and looking at the external environment. In order for a business to survive and thrive, it needs to have a purpose for its existence. This purpose is summed up by a mission statement. As for the company’s future, the vision statement provides a clear direction to where a company wants to go, given its purpose for existence. Mission Statement: The company exists to provide great tasting cookies for students surrounding the vicinity of the business and a decent return on investment to owners. Vision Statement: To become a leading provider in the market with the best-tasting cookie to be preferred as their ultimate snack food. 2) A list of long-run strategies to be used by the company that can be used to accomplish the mission statement goal(s). In order to fulfill the mission and vision of the companies, goals are set, which leads to creation of strategies to fulfill these goals. From a corporate-level perspective, a growth strategy in a market where dissatisfaction level is high because of unavailability of good-tasting snacks is the best strategy to adopt. There are large rooms for growth in the market, which can provide good returns to the owners. The following are the strategies at the functional-level within a company, for functions like marketing and hr. This is in line with the strategy of the company to pursue growth in its operations. Strategic marketing: a cookie is a consumer product, this company should use ‘branding’ to make the business operations more sustainable (due to lack of demographic, psychographic and behavioral data regarding the target market, this is the targeting and positioning strategy for the case) Primary target market: cookie-lovers, belonging to the elementary, middle and high school students market Secondary target market: elementary, middle and high school students Positioning statement: our best-tasting cookie is the most-suited treat for your snack Strategic marketing requires a company to focus on its consumers as the center of its operations, and build a long-term relationship with each of them. Successful companies learn that by acquiring consumers, then constantly fulfilling their wants and needs up to their desired satisfaction level is more profitable by retaining them and selling new products, than selling new products to new consumers, which can entail more costs for acquiring. This will also help the company become more productive in its operations, anticipating the demands and level of sales through consumers’ behavior, which in turn gives a company an opportunity to cut down the costs according to the levels of sales. Strategic human resource management: Organizational structure: General manager Manufacturing department Abel’s baking facility bakers Marketing and sales department Van delivery team (sales agent and van driver) Marketing team to craft brand strategy and brand relationships General administration department Take charge of human resource decisions: recruitment, employee compensation, training and development Take charge of finance and accounting decisions: Accounting Treasury The proposed broad organizational structure should provide the company with flexibility, while maintaining the core specializations within each department. By employing cross-functional planning and coordination among the three departments, the company can adapt easier to the changing preferences and tastes of its consumers, while delivering them the products that address their tastes in a more rapid manner to the market through distribution. 3) A value chain for the company which: a) identifies the crucial business process In order to provide the consumers with excellent cookies, your main products, the value chain should start from the consumer (crafting marketing strategy), going back to the company (manufacturing) and going back to consumer (distribution). By understanding the tastes and preferences of your target market, these students that surround the vicinity of the company’s place of operation, your company will be able to come up with a best-tasting cookie, as well as how these consumers can be better reached and how to talk to them in order to persuade them to buy and maintain a relationship with them for the long run. The following are the steps for, or the business processes that comprise the value chain: 1. crafting marketing strategy a. accumulation of appropriate marketing data: demographic, psychographic and behavioral data of target market, even through qualitative research only (e.g. observation, focus group discussions) b. determination of the competition, indirect and direct competitors c. identification of the appropriate insights from consumers: explicit need (delicious and nutritious food for snacks), implicit need (i.e. emotional needs) d. create the values, identity and personality for the brand e. craft the functional and emotional benefits for the brand f. offer a unique selling proposition for the brand g. do the promotional plans for the cookies as product 2. determination of sales forecasts 3. manufacturing of forecasted number of cookies 4. accounting of sales, as well as costs from orders of schools 5. distribution to schools by delivery teams 6. customer support for feedback, comments and suggestions b) demonstrates how the business process are related to each other and how they enable the achievement of the company’s mission statement goals. In order to become the preferred snack, the cookie has to taste good and fit perfectly the palate of its customers. This requires the company to start knowing its consumers well and learning a lot about them. By gathering marketing data, or answers to questions such as who are these consumers, how much they spend for snack, what are their interests and preferences, how should we talk to them—a company has a better advantage of making them loyal to buying the company’s cookies. This also provides a firm ground for the business to craft a branding strategy in order to fulfill the company’s long term vision and mission. After determining the customer preferences and their purchasing behavior towards the product, the company can better forecast the level of sales. After the level of sales has been determined, the appropriate costing for the manufacturing will provide efficiency, as well as getting rid of wastes in operations that could cause losses. This provides sustainability in the company’s operations. Then the subsequent business processes, such as manufacturing, accounting of sales, and distribution will deal with the creation of the product itself, as well as delivering the product to the market to reach the consumers. 4) A proposed balanced scorecard for the company which includes a list of: a) The perspective(s) being addressed b) The strategies within the perspective(s): i.e., what are the strategies attempting to achieve? c) The critical success factors (measures) being used to determine whether the strategic objectives are being met? d) The measurement tool being utilized to access the performance of the critical success factors. Because operational measures, in the case of Cheapchip are viewed as the drivers of future financial success, it is only wise for Cheapchip to capitalize on its internal competitive advantage. With this, a balanced scorecard can be used in order to measure performance. Financial perspective: return on capital employed. With its investment in new technology to further lower down its costs, it should use the return on capital employed as one measure of success for its operations. However, this should not be limited to fixed capital only. By investing in marketing activities to provide higher satisfaction levels to customers, it can also be included in the measure. Customer perspective: customer loyalty, better satisfaction level through better value to match price. By means of marketing research studies and customer satisfaction surveys, Cheapchip will know if it gains the desired satisfaction level among its consumers to ensure customer loyalty. It should pursue marketing activities that will build long-term relationships with its consumers. Internal/business process perspective: process quality, process cycle time. Cheapchip should continue to employ its lean processes by checking the quality of its processes, such as the quality of customer service, the quality of purchasing processes as well as the cycle time in order to eliminate waste and continue on improving its lean operations. Learning and growth: employee skills. In order to sustain its ability to change and adapt to the preferences of its consumers while not sacrificing its positioning, it has to invest in training its employees. For certain skills of employees that are gauged and measure to contribute to its lean processes and customer service, it will be able to sustain its positioning and support its strategy to meet financial success. MODULE II 1) What kind of profit can be expected from the sale of the cookies? The sale of cookies will provide the company what is called ‘sales revenue’ or revenue gained from the sale of goods, in contrast to service and other classification of revenues. Sales revenues are apparent in the financial statement of a company engaged either in merchandising or manufacturing. 2) What types of accounting/financial information do they need in order to successfully operate the business? In order to successfully operate the business, the company should start with a budget from which the actual operations of the business will be gauged in terms of effectiveness (meeting goals that are set), and efficiency (being able to maintain costs in order to maintain profitability). This budget is comprised of two parts: an operating budget and a financing budget. The operating budget is comprised of sales forecast, cash collections budget based on the sales forecast and collections policy of the company, the purchases budget based on the forecasted level of sales, operating expense budget based on the expenses on that period, and accompaniment of a cash disbursement schedule based on the expenses that should be paid for that period; these schedules will aim to provide information to make the budgeted income statement for the period. On one side there is the operations, on the other side there is the financing to support it. The financial budget is comprised of cash budget, capital budget, and the budgeted balance sheet. These are the information that a company needs in order to make the business decisions that will affect the operations. 3) Explanation of the table of costs As for the managerial decisions that will affect profitability of the business, managers need to know the behavior of costs that are associated with the operations. In Cheapchip’s case, there are two types of costs associated in its operations—product costs, which are all the costs to producing the cookies, and the period costs which are necessary costs when conducting the rest of the company’s operations. The product costs are further classified according to the behavior of these costs that will affect the profitability of products—the variable costs which increase as the quantity of products are produced, and the fixed costs which remain fixed at any level of production. When the company produces cookies, there are costs that are incurred such as the materials in the recipe, as well as the packaging are used for the manufacture of cookies, the direct labor which are labor that are traced to the manufacture such as the bakers’, and the other supplies that are small in amount to be traced in the product such as condiments. As for the fixed costs or costs that are fixed in any given level of production activity, include manager’s salaries in the baking facility, employee trainings, supervisory salaries, depreciation of such equipment as large scale mixer and professional oven, property taxes if the place where baking facility is owned or rent if leased, and insurance expense. Other than the manufacture of products, there are other costs related to reaching the customer, and is part of the customer value chain. These are called period costs. Like product costs, period costs also have variable and fixed components. One of the period costs, selling expense, is comprised of its variable components such as gas expenses for delivery and commission for van salesmen. These costs are variable depending on the number of cookies sold to the places where those are distributed. As for the fixed costs for the selling expense, the basic salary portion of the salesmen’s compensation is included, as well as advertising. The other period cost for Cheapchip is its administrative expenses. The variable part of this cost is some clerical wages, which are traceable to the level of sales the company has made. The fixed part of this comprises office salaries, other salaries, depreciation on office facilities, public accounting fees, legal fees, etc. MODULE III In order for the owners to successfully operate the business, careful planning and forecasting of financials is necessary. This means that the owners should look at the future demands, do forecasts and craft budgets according to these forecasts. One of the most vital, if not the most vital budget the owners need to construct is the budgeted income statement. This represents the income the owners plan to earn, in relation to the levels of sales that are forecasted in the future. This will enable the owners to look into the future and prepare for the costs associated with various sales level, in order to decide if matters like additional financing would be necessary. In order to construct the budgeted income statement, we determine the following data and do them step-by-step: The variable costs: direct materials costs per batch of cookies made direct labor costs per batch of cookies variable indirect manufacturing costs variable selling, general and administrative expenses The fixed costs manufacturing fixed costs supplies selling, general and administrative expenses initial investment costs fixed assets working capital (supplies) the CVP relationships breakeven sales sales units required to cover fixed costs sales dollars required to cover fixed costs planned sales sales units required to cover fixed costs as well as annual ROA of 20% sales dollars required to cover fixed costs as well as annual ROA of 20% The variable costs Based on exhibit 1 or the recipe for the cookies, we derive the costs for the direct materials as follows: Schedule A - direct materials                     Conversion approximations:     1 oz = 6 teaspoons     1 lb = 2 1/8 cups     unit recipe cost/pack # serving cost/serv. allocation       ParkWay Butter 1LB/454 g costs $1.49 cup 2 1.49 2.125 0.701176 1.402353   Robinhood Apurpose Flour 5LB/268 g Costs $2.59 cup 4 2.59 10.625 0.243765 0.975059   Davis Baking Soda 10 oz/284 g Costs $4.88 teaspoon 2 4.88 60 0.081333 0.162667   Davis Baking Powder 10 oz/284 g Costs $4.89 teaspoon 2 4.89 60 0.0815 0.163   Quaker Oatmeal 900g Costs $4.67 cup 5 4.67 4.25 1.098824 5.494118   Shop-Rite Chocolate Chip 1LB/680 g costs $4.89 ounce 24 4.89 16 0.305625 7.335   Salt per1LB/454 g costs $2.45 teaspoon 1 2.45 96 0.025521 0.025521   Hershleys Chocolate Bar 8.1 oz/113 g costs $2.49 piece 1 2.49 1 2.49 2.49   Dunkley Eggs per dozen costs $4.50 piece 4 4.5 12 0.375 1.5   Shop-Rite Chopped Walnuts 6oz/170 g $3.99 cup 3 3.99 0.796875 5.007059 15.02118   Vanilla Extract 10 oz/284 g costs $9.76 teaspoon 2 9.76 60 0.162667 0.325333   Lantic Natural Brown Sugar 1kg costs $1.86 cup 2 1.86 4.684775 0.397031 0.794062   Lantic Natural Grandulated sugar 2 kg costs $2.73 cup 2 2.73 4.684775 0.582739 1.165478     Total direct material costs per batch (112 cookies)         36.85377 Given the retail prices of our ingredients for the recipe, we determine how many servings according to the unit specified in the recipe is contained per pack of ingredient. When we convert and determine the mass of one ingredient, we are able to derive some very important costs figures per ingredient: the cost per unit of serving required in the recipe. This cost, when multiplied to the number of servings according to the unit—say 1 cup of butter costs 0.70 cents, therefore if we need to cups as instructed in the recipe, the total cost of butter we use is 1.40, and so forth and so on. After determining the cost allocation for our ingredients, we total it and we get the whole amount of the direct materials that we use for one batch or 112 cookies. The following are the other components of the variable costs: Schedule B - direct labor                     assumption: wage/hourly rate for people attending the machinery is $6,     therefore direct labor is $3 per batch (30min=1batch)       Schedule C - variable overhead (indirect) manufacturing costs         as per the given figures: its twice the direct labor costs per batch     assumption: twice direct labor per batch is 2 x 3 = $6, variable manufacturing overhead per batch       Schedule D - variable sg&a costs         as per the given figures: variable selling, general and administrative expenses amount to $0.25 per cookie With the right information, we can now see how much costs we incur for every cookie that is made: Variable costs         Batch Unit       Direct materials (Schedule A) 36.85377 0.3290515   Direct labor (Schedule B) 3 0.0267857   Variable overhead (Schedule C) 6 0.0535714   Variable sg&a costs (Schedules D) 28 0.25     Total variable costs       73.85377 0.6594087 The fixed costs In order for us to determine how many we will need to sell as per the cost-volume profit analysis that we conduct, we need to know the fixed costs, and the investment costs to know how much is an ROA of 20% for the business: Fixed costs                   Total fixed manufacturing overhead costs 20000     Supplies-overhead cost 1000     Fixed sg&a costs 40000     Depreciation 4600     Total fixed costs 65600                   Our fixed costs are comprised of the total fixed manufacturing costs overhead costs of 20,000, supplies that are replenished that amounts to 1000, fixed selling, general and administrative expenses that costs roughly 40,000 and depreciation of 4,600. All in all, our fixed costs amount to 65,600. The initial investment costs Initial investment costs                   Fixed assets     Professional oven 20000   Large capacity mixer 2000   Working capital     Supplies 1000   TOTAL INVESTMENT COSTS 23000                   Initial investment costs are comprised of the equipment or fixed assets costing 22,000. We need to incorporate the other investment costs such as working capital, that includes supplies costing 1,000. All in all, our investment costs total to 23,000. This figure is helpful, as if we would like to determine how much a return on assets of 20% would be, this would give us 4,600. The cost-volume-profit analysis CVP relationships                   Fixed Assumption     Expenses* Variable Expense Price Contribution margin Sales (units) required Sales (dollar) required         65600 0.66 0.50 -0.16 -410000 -205000     65600 0.66 1.00 0.34 192941 192941.18     65600 0.66 1.50 0.84 78095 117142.86     65600 0.66 2.00 1.34 48955 97910.448     70200 0.66 0.50 -0.16 -438750 -219375     70200 0.66 1.00 0.34 206471 206471     70200 0.66 1.50 0.84 83571 125357     70200 0.66 2.00 1.34 52388 104776         *fixed expenses=fixed overhead costs (supplies of 1000+total costs overhead of 20000)   + fixed sg&a costs (40,000) + depreciation of 4600         70,200= fixed expenses + 4,600 (ROA of 20%)                     Because we are determined to see the level of sales where our fixed costs will be covered, or our breakeven point, we conduct the cost-volume-profit (CVP) analysis. We determine the breakeven point by determining our fixed expenses, divided by the contribution margin or the difference between the assumed price per cookie less than the variable expenses. This gives us the level of sales, in unit that is required to breakeven, then we multiply it with the assumed price in order to determine the level of sales required in dollars. If we further want to know the level of sales in order for the owners to get a return of 20% in its investment, we add 4600 to 65600 or our fixed costs. We get 70,200, which we divide with the contribution margin. This therefore results in the level of sales in units that are required to both cover the fixed costs, as well as give a 20% ROA to the owners. Then again, we multiply the units by the assumed price in order to translate the level of sales in dollars. The significant levels of sales are those where the price is greater than the variable costs of 0.66. In our analysis, the starting point where operations become profitable at the given level of costs is 1.00. This also comprises the required sales units that are not impossible to achieve, since in 180 days with 10,000 students, if an assumption that these would all buy a piece of snack, would turn out to be 1,800,000 pieces of snacks—our level of sales starting at 1.00 and up are small enough for us to see that it is not impossible. Although the level of sales start to be profitable, business will remain feasible at the level of price the students will be willing to pay. At such a high price of 2.00, our CVP analysis reflects that fewer selling efforts are needed as the high contribution margin compensates the thing. But if students perceive this price as very high and will make them decide not to buy, it is not an optimal price level after all. The budgeted income statement After all these, especially the level of sales that will allow us to give a decent income equals to 20% ROA, we break down the figures into a budgeted income statement. Here we see, that the three demand levels, as given by the CVP analysis, will all yield to more than the required income to earn ROA of 20%. The margin of safety is the difference between the breakeven sales and the planned sales. In our case, the breakeven sales is the level of sales that covers our fixed expenses of 65,600 (refer to CVP analysis); the planned sales is the level of sales that covers the fixed expenses plus the required income of 4600 to get the ROA required by the owners. In this case, for 1.00 a cookie, the margin of safety would be 13,529; sales of 5476 for 1.50 a cookie; and 3,433 for 2.00 a cookie. The operating leverage depending on price, as the contribution margin increases, increases dramatically. This is because, operating leverage being the ratio of fixed costs to variable costs, increases with our low variable costs. In order to gain an inside-out, or operational competitive advantage, more cookies should be manufactured in order to spread the fixed costs, thus lowering the total costs per cookie and increasing the profit per sale of cookie. A small change in the sales volume will result in the large change in net income. The downside of it is, if the sales level of to breakeven, or as planned is not met, a large decrease in the net income is to be expected too. Budgeted income statement                   Demand-level 206471 83571 52388     Price 1.00 1.50 2.00         Sales 206470.59 125357.14 104776.12     Less: variable expenses     Direct material 67939.46 27499.305 17238.371     Direct labor 5530.4622 2238.5204 1403.2516     Variable indirect manufacturing costs 11060.924 4477.0408 2806.5032     Total variable manufacturing cost of goods sold 84530.847 34214.867 21448.125     Variable sg&a expenses 51617.647 20892.857 13097.015     Total variable expenses 136148.49 55107.724 34545.14     Contribution margin 70322.094 70249.419 70230.979     Contribution margin percentage 34% 56% 67%     Less: fixed expenses     Manufacturing 20000 20000 20000     Supplies 1000 1000 1000     SG &A 40000 40000 40000     Total fixed expenses 61000 61000 61000     Operating income 9322.0942 9249.4191 9230.9791     Less: depreciation 4600 4600 4600     Net income 4722.0942 4649.4191 4630.9791         OPERATING LEVERAGE 45% 111% 177%     MARGIN OF SAFETY 13529 5476 3433         operating leverage of company: small changes in sales volume, result in large change in net income       therefore, beyond breakeven point, company will benefit from additional volume To answer the second question, as owners that will have control over the business, financial and accounting information for managers are the ones that are needed in order to make the business successful. Because information that is provided by managerial accountants is vital to decision-making, this information tells more than those of a financial accountant. Managerial accounting provides information concerning the behavior of various costs, as they impact profitability. When the owners should be concerned of their ROA, it would not be attained if decisions that are needed in order to achieve it are made on the wrong basis, or without accurate information as managerial accounting provides. As managerial accountant, information that aid decision-making as regards Cheapchip’s operation is what can be provided to the owners. Read More