Reported Financial Figures of REC - Essay Example

Based on the previous results, the company prepares a projected income statement for the next accounting period to estimate the likely outcome of its operations and sales. This also helps the company to determine variances observed in the actual financial results of the company. The company’s expectations from its business for the complete year 2004 are given as a budgeted income statement in Exhibit 2 which indicates that the company expects a monthly average profit of $60,000 (Profit Before Taxes: $720,000/12). These projections are based on the expected number of sales of equivalent units for the year 2004 i.e. the company estimated sale of 10,000 equivalent units which implies an average monthly sale of 830 or 840 units.

Based on the comparison between the actual financial results of REC, Inc. and its budgeted income statement it could be ascertained that the company’s profit results for January 2004 fell short by $78,000. This has been against the expectation of the company’s management as the business followed the trend that it has experienced in the last few years related to the market conditions and business cycle. The variation in the actual financial results from the budgeted income statement can be evaluated by examining every element of the actual income statement and comparing it to the budgeted figures for these elements.

One of the limitations of the above presented budgeted financials every month is that it does not take into account the changes in the business cycle and market conditions which may occur during the financial period. For example, sales of the business could be affected due to the seasonal downturn in a particular month. Therefore, a better analysis would have been possible if the company was preparing a budgeted income statement every month.

The table above indicates that the company has not been able to achieve its expected sales targets in January 2004. This hurts the firm’s ability to achieve its budgeted profit target. The cost of goods sold remained at 66% of the sales which is consistent with the budgeted income statement. The gross profit which is the difference between sales and cost of goods sold has been recorded to be $57,800 lower than the budgeted income statement. Both selling experiences and the general corporate overhead of the company have been greater than the budgeted values. This is determined by calculating the proportion of both selling expenses and general corporate overhead for January 2004. The budgeted proportions for both types of costs are 14% and 8% whereas the actual values were 16% and 11% respectively. This can also be analyzed using the variance analysis of each component of the selling expenses and general corporate overhead.

Exhibit 1 shows unfavorable and favorable movements in different cost elements. From this, it could be suggested that the direct material and fixed manufacturing overhead - spending has remained favorable whereas the direct labor, variable manufacturing overhead, and fixed manufacturing overhead – volume have remained unfavorable resulting in a net unfavorable effect on the profit of $40,000. These variances are reflected in the income statement, which is different from the basis of standard costs used in the budgeted income statement for the year 2004. Based on the detailed analysis presented here, it could be suggested that the poor profit result in January 2004 has been due to the misjudgment or prediction about the conditions that the business could have faced during the month of business slow down.
Question 2:

In this question, the breakeven point has been determined both in dollars and unit values. For calculating the breakeven point the following formula is used:
Break Even Point (BEP): Fixed Costs / (Sales – Variable Costs)
The financial information has been obtained from Exhibit 2 as follows:
Fixed Costs: Fixed Manufacturing Overhead + Fixed Selling Expenses + General Corporate Overhead: $840,000 + $240,000 + $480,000 = $1,560,000
Sales: $6,000,000
Per Unit Sales: $6,000,000 / 10,000: $600
Variable Cost: Direct Labor + Direct Material + Variable Manufacturing Overhead + Variable Selling Expenses: $840,000 + $1,560,000 + $720,000 + $600,000 = $3,720,000
Per Unit Variable Cost: $3,720,000 / 10,000 = $372
Contribution Margin: $600 - $372 = $228
BEP (Units): 1,560,000 / 228 = 6,842 units
Contribution Margin: $6,000,000 - $3,720,000 = $2,280,000
Contribution Margin Ratio: $2,280,000 / $6,000,000 = 0.38 or 38%
BEP (dollars): $1,560,000 / 0.38 = $4,105,263 Read More