Cost Behavior Analysis And Profitability Evaluation For Sports Strength

Variable Cost Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Fixed	Mixed	Step
C Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	b	a	e
d	F

Operating Profit Equation

Part 2

Part a

Operating Profit Equation=

(Sales * P/V Ratio) – Fixed Expenses

1039500 * 20% – 168000

$                                                                                                                                 39,900.00

Part b

Total Number of units sold=

Total Sales/ Selling Price per unit

1039500/20

51975 units

Actual Number of Jerseys sold this year	51975
Units sold = 90% of Planned Sales Units
Total units planned	51975/90%
Planned units	57750 units

	Actual	Planned
Number of Jerseys sold	51975	57750
Sales	$                                         1,039,500.00	$  1,155,000.00
Less : Variable costs
Cost of goods sold	$                                            769,230.00	$      854,700.00
Sales Commission	$                                               62,370.00	$        69,300.00
Total Variable Expenses	$                                            831,600.00	$      924,000.00
Contribution per unit	$                                            207,900.00	$      231,000.00
Less: Fixed Cost
Selling Expenses	$                                            116,500.00	$      116,500.00
Administrative Expenses	$                                               51,500.00	$        51,500.00
Total Fixed Costs	$                                            168,000.00	$      168,000.00
Operating Income	$                                               39,900.00	$        63,000.00
Less Tax @ 30%	$                                               11,970.00	$        18,900.00
Profit After Tax	$                                               27,930.00	$        44,100.00

The extra profit that could be earned if planned units are actually sold $ 16,170 (44100-27930)

Part c

Variable costs
Cost of goods sold (55000*14.80)	$                                            814,000.00
Sales Commission (55000*1.20)	$                                               66,000.00
Total Variable Cost	$                                         1,628,000.00
Fixed Cost
Selling Expenses	$                                            116,500.00
Administrative Expenses	$                                               51,500.00
Total Fixed Costs	$                                            168,000.00
Total Cost of 55000 units to be reported in income statement	$                                         1,796,000.00

 Part d

Change in the operating profit equation:

Sales * PV Ratio – Fixed Expenses

1039500 * 20% – (168000+20000)

$ 19,900.00

Part e

Income Statement for the year

Number of Units	60000
Sales (60000*20)		$  1,200,000.00
Less : Variable costs
Cost of goods sold (60000*14.8)	$                                            888,000.00
Sales Commission (60000*1.20)	$                                               72,000.00
Total Variable Expenses		$      960,000.00
Contribution per unit		$      240,000.00
Less: Fixed Cost
Selling Expenses	$                                            116,500.00
Administrative Expenses	$                                               51,500.00
Additional Fixed Cost (Advertisement)	$                                               20,000.00
Total Fixed Costs		$      188,000.00
Operating Income		$        52,000.00

In part e the analysis has been undertaken to evaluate the worthiness of arranging an advertisement campaigns which will cost $ 20000 on an annual basis. The advertisement expense is a fixed cost in nature as it is a one-time payment that has to be made by Sports Strength and would not vary with the change in the level of production or sales. The advertisement campaign will enable the company to make of additional sales of 8025 units. As a result of increased sales, the operating income (before tax) of the company will also increase by $ 12,100. Hence, it is advisable to the company to accept the proposal of undertaking an advertisement campaign. The business of Sports Strength requires all types of cost to be incurred to operate successfully. It has incurred certain variable costs, fixed costs, mixed costs and step costs. Fixed costs are those costs which remains same irrespective of the production level. However, variable cost keeps on changing with the change in the level of production. The sales commission varies with the level of sales made by the company in this year. Also the cost of goods sold includes various items such as direct material cost, direct labour and other overheads. The expenses that are of fixed nature in case of Sport’s strength are various selling expenses, website hosting cost, rent of credit card processing equipment and other administrative expenses. The information regarding the cost behaviour can be used in the decision making process to a significant extent as it will tell the managers of changes in the level of cost with the change in the level of sales and production is made.  It will enable the managers to determine which activities involve higher costs and how the cost of such activity will affect the business profitability (Garrison, et. al., 2010). Further, the contribution margin is the level of sales revenue that remains after the payment of prime cost of production of variable nature. The contribution margin helps the managers to rank the products on the basis of their profitability potential. The analysis of contribution margin will help the manager in undertaking various critical decisions related to the business.

Breakeven Analysis

For instance, a manager may use such information to decide whether to introduce a product or to shut down the existing one from the business to make it more profitable (Hansen, Mowen & Guan, 2007).  If a product has a negative contribution then it shall not be accepted by the managers. Also, the information in regards to the behaviour of a particular cost to the change will help the managers to determine whether any change in such cost will provide the company a benefit or the cost will be exceed the benefits of such expense.

Part a

Breakeven Point (Units)	Total Fixed Cost
	Contribution Per Unit
	168000
	4
Units	42000
Breakeven Point (Dollars)	Total Fixed Cost
	Contribution Margin
	168000
	20%
Dollars	$                         840,000.00

Part b

Margin of Safety	Total Sales Units-Breakeven Sales Units
	51975-42000
MOS sales Units	9975
MOS sales dollars	1039500-840000
	$ 199,500.00

Part c

	Total	Per unit price
Selling Price	1039500.00	20
Less: Variable Expenses
Cost of Goods Sold	795217.50	15.3
Sales Commission	62370.00	1.2
Total Variable Expenses	857587.50	16.5
Contribution Margin	181912.50	3.5
Total Fixed Cost	168000.00
Operating Profit	13912.50

Decrease in the operating income

Operating income at the same level when the price of jersey was $ 14.80	$39,900.00
Operating income at the same level when the price is increased to $ 15.30	$13,912.50
Decrease in the operating income	$25,987.50

Part d

Option 2
Campaign Cost	5000
Sales Commission %	4%
Increase in sales salaries	220000
Additional Sales Volume	10%
New Sales Volume	57173	(51975*110%)
Sales	$                     1,143,450.00	(57173*20)
Less: Variable expenses
Cost of Goods Sold	$                         874,739.25	(57173*15.30)
Sales Commission	$                           45,738.00	(1143450*4%)
Total Variable Expenses	$                         920,477.25
Total Contribution Margin	$                         222,972.75
Less: Fixed Cost
Selling Expenses	$                         143,500.00	116500+5000+22000
Administrative Expenses	$                           51,500.00
Total Fixed Cost	$                         195,000.00
Operating Profit/(Loss)	$                           27,972.75

Part e

The original operating income was $ 39,900. However, with the increase in the price of the jersey that is purchased from Sport’s Strength from $ 14.80 to $ 15.30 will call for some loss of operating income generated by J&B Sports during the course of its business operations. However, the company has a plan of transferring the total increase in price of jersey to the ultimate customers by increasing the selling price with the same amount i.e. $ 0.50. Thus, the new selling price of jersey will be $ 20.50. Though, it is obvious that the increase in selling price of jersey will reduce its demand in the market. Therefore as a part of plan 1, the company will undertake an advertisement activity that of amount $ 10,000. The increase in purchase price will be compensated with the increase in selling price of Jersey. However, additional advertisement cost will increase the level of fixed cost by $ 10,000 that will reduce the operating income of the company by $10,000.

However, if the reduction in operating income is higher than the advertisement cost, then the possible reason could be that during the current year the company might purchase more jerseys from its suppliers at the increased price but it does not sell the same units in the market and sell some lesser units. Thus, the reduction in operating income more than the cost of advertisement will only take place in the situation when the units purchased are more than the units sold.

MEMO

To: Managers

From: Management Accountant

Date: 22^nd November, 2018

Re: Selection of an appropriate plan

As the purchase price of jerseys is increased in the market by $ 0.50 it is necessary for J&B Sports to opt a plan under which arrangement can be made to avoid the reduction in operating income as a result of price increase of the material purchased from its suppliers. Plan 1 will require the company to increase the selling price of Jerseys with the same amount as the increase in the purchase price. However, the increase in the selling price will certainly reduce the quantum of sales unit. Therefore, a new advertisement activity will be undertaken by the company to maintain the level of sales units as constant with the previous sales unit. The net reduction in the operating income will be $ 10000.

Operating income at the same level when the price of jersey was $ 14.80	$ 39,900.00
Operating income at the same level when the price is increased to $ 15.30	$ 29,900.00
Decrease in the operating income	$ 10,000.00

Worthiness of advertising campaign

On the other side another plan is also available with the company under which it can undertake an advertisement campaign at $ 5000 and increase the salaries of sales personnel by a total amount of $ 22000 and at the same time reduce the rate of sales commission by 2% from the existing rate of 6%. This will result in increase of sales units by 10%, making the total sales of 57173 units in total. This plan will result in reduction of operating income from the original level of $ 39,900 by $ 11,927.25.

Operating income at the same level when the price of jersey was $ 14.80	$ 39,900.00
Operating income at the same level when the price is increased to $ 15.30	$ 27,972.75
Decrease in the operating income	$ 11,927.25

From the above analysis, it can be observed that plan 1 is better than plan 2 and it will result in reduction of relative lesser operating income than plan 2.

Part a Predetermined Recovery Rate	Budgeted Manufacturing Overheads/ Budgeted Labour Cost
Manufacturing Overheads=	Manufacturing Overhead Per Unit * Number of Units	Total
Shorts	3*13500	40500
Jerseys	2.40*3200	7680
Jackets	18*2500	45000
Total Overheads (A)		93180
Total Direct Labour Cost of 3 products
Labour Cost	Labour Cost Per Unit * Number of Units	Total
Shorts	2.40*13500	32400
Jerseys	1.92*3200	6144
Jackets	11.40*2500	28500
Total Labour Cost (B)		67044
Predetermined Overhead Rate=	93180/67044	$1.39

Total manufacturing cost of June:

Total Manufacturing Costs
Direct Material	$                                                                                     191,591.00
Direct Labour	$                                                                                       74,208.00
Manufacturing Overheads  (74208 *1.39)	$                                                                                     103,136.77
Total Manufacturing Costs	$                                                                                     368,935.77

Cost of goods manufactured:

Cost of Goods Manufactured	Shorts	Jersey	Jacket
Direct Material cost	$                                                                                        60,345.00	$  21,920.00	$  111,800.00
Direct Labour cost	$                                                                                        32,400.00	$    6,144.00	$    28,500.00
Manufacturing overheads	$                                                                                        40,500.00	$    7,680.00	$    45,000.00
Total Manufacturing Costs	$                                                                                     133,245.00	$  35,744.00	$  185,300.00
Opening WIP	$                                                                                              717.00	$    1,802.00	$      3,046.00
Closing WIP	$                                                                                                       –	$    1,117.00	$                   –
	$                                                                                     133,962.00	$  36,429.00	$  188,346.00

• Closing WIP:

	Shorts	Jersey	Jacket
Units Finished	13500	3200	2500
Opening WIP	100	200	50
Units Produced this year	13400	3000	2450
Units Sold	14000	3100	2500
Closing WIP	0	100	0
Cost per unit of WIP	9.87	11.17	77.12
Cost of closing WIP	0	1117	0

1. Gross Profit:

Gross Profit Calculation	Shorts	Jersey	Jacket
Sales	$            168,000.00	$  45,880.00	$  312,500.00
Less: Cost of goods sold	$            138,897.00	$  35,312.00	$  188,346.00
Gross Profit	$               29,103.00	$  10,568.00	$  124,154.00

Working notes:

	Shorts	Jersey	Jacket
Units Finished	13500	3200	2500
Opening Units	500	0	0
Units Sold	14000	3100	2500
Closing Units	0	100	0

Cost of goods sold

	Cost of Goods Sold	Shorts	Jersey	Jacket
	Cost of goods manufactured	$            133,962.00	$  36,429.00	$  188,346.00
Add	Opening Inventory	4935
Less	Closing Inventory		1117
	Cost of goods sold	$            138,897.00	$  35,312.00	$  188,346.00

In case of shorts, the closing stock of finished goods is Nil as units sold during the current year are more than the units produced during the year taking the difference to the opening inventory of finished goods account.

In case of Jersey, the closing stock of finished goods inventory is more than the opening inventory because units sold during the year are less than the units produced. So the remaining units (3200-3100) units are taken to closing stock of finished Jerseys.

In case of jacket the number of units finished during the year is equivalent to the number of units sold and hence there is no opening and closing stock.

As per the accounting professional code of ethics the members of accounting profession have the duty to act in the best interest of the general public by following the fundamental principles prescribed under APES 110: Integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. All these principles are to be strictly followed by the professional accountants while fulfilling their professional obligations. In the present case, the management accountant has manipulated the cost records with the motive of deceiving the managing directors of the company. The payment of bonus is dependent on the performance of employees in terms of all the four objectives as decided by the managing director of the company. Out of those four financial objectives, one objective was not achieved due to which the employees were ineligible for the receipt of bonus payment. The cost of goods sold was manipulated by the internal accountant so as to keep it below the level of 70% of the total sales. This adjustment was done against the principle of integrity and objectivity. Hence, it can be said that the accounting adjustments made by the internal accountant of the company is the breach of Australian Accounting code of ethics.

Cost behavior and decision-making

Rather than acting in the interest of the employees of the company in an unethical manner, the accountant must have acted in such a way the code of ethics could be complied in absolute sense and the decision of accountant could be based on his professional judgement without any conflict of interest (APESB, 2010).

Due to the unethical acts of internal accountants of J&B Sports, the company might have to face both financial and non-financial consequences. In terms of financial implications, the company will have to suffer loss as a result of payment of unreasonable bonus payment. In reality, no payment of bonus was supposed to be made on accountant of non-fulfilment of certain financial objectives of the business but due to manipulation of accounting records, the company had to make payment of bonus compensation. In terms of non-monetary implications, the company had to face loss of public image because of lost integrity of financial statements. Further, the employees are given an undue-advantage which could make them careless about their responsibilities in the subsequent periods also which will ultimately affect the overall business performance of J&B Sports.Calculation of Activity Rates

Activity Pool		Activity Driver		Activity Rates
Product Design	$ 83,889	Number of product lines	3	$27963
Warehousing	$ 170,562	Number of batches	9170	$18.6
Cutting	$ 147,108	Number of cuts	56580	$2.6
Sewing	$ 206,820	Direct labour hours	86175	$2.4

Part b:

Classification of activities on the basis of ABC cost hierarchies

Product Design Cost	Product Sustaining Cost or Product Level Cost
Warehousing/Packaging Cost	Batch Level cost
Cutting Cost	Unit Level Cost
Sewing Cost	Facility Level Cost

Part c

Statement of total annual cost included in the cutting cost

Schedule of Cutting Cost	Total Annual Cost
Original Cost	$ 147,108
Share in operating Cost	$ 14,082.00
Total Cutting Cost	$ 161,190.00

Assumption: It has been assumed that the increase in the operating cost is totally related to the cutting activity and hence it is entirely allocated to the cost of cutting activity.

Part d:

Cost per cut when the electric cutting tool is purchased:

Cost Per Cut	Total cutting cost/Number of cuts
	161190/56580
	$2.85

Part e:

With the acquisition of new tool the activity rate of warehousing or packaging will also change as the new cutting tool will improve the batch size of Jerseys.  Currently, the batch size is of 35 units of Jerseys but after purchasing the cutting tool J&B Sports will be able to produce 15 extra units per batch. The batch rate as determined above is $ 18.5 per batch. During the year total jerseys that were produced were 3200. Therefore, the numbers of batches produced were 91. However, when additional units were produced per batch, the new number of batches will be 64. Ultimately, there will a reduction of 27 batches of Jerseys in total. This will in turn reduce the total warehousing and packaging cost of $ 507.43. The revised warehousing or packaging cost will therefore be 170054.57 (170562-507.43). Also, the new number of batches will be 9143 (9170-27). The purchase of new equipment will not affect the batch size of shorts and jacket product line of the company.

Variable Costs

Therefore, the new warehousing or packaging rate per batch will be $ 18.60.

Part f:

The unit cost all the three products i.e. jersey, jacket and shorts will be changed with the purchase of the new cutting tool as the activity rates of cutting activity and warehousing activity will change. The activity rate of cutting activity will increase the new tool will cause increase in the annual operating cost by $14,082. However, at the same time, the company will be able to increase it batch size of production of Jersey product that will reduce the cost of packaging per batch given that 3200 units of jerseys will be produced after the acquisition of new cutting tool. The revised rates per activity will be applied to all the products produced by the company. Under Activity Based Costing technique the cost of each product is determined on the basis of common activity rates which are applied to the total quantum activities undertaken for a particular product (Granof, Platt, & Vaysman, 2000). As the activity rate remains common for all the products the cost per product is deviating (Drury, 2013).

Part g:

MEMO

To: Manager

From:  Management Accountant

Date: 22^nd November, 2018

Re: Decision of Purchase of new cutting tool

This is in regards to the proposal of new cutting tool at J&B Sports. The company is applying activity based costing and due to which rate per activity is determined commonly for each product and is applied to the total number of activities consumed in each product. Under activity based costing the unit cost all the products will change after the acquisition of new cutting tool because the rate per activity carried on per unit of different products i.e. jackets, jerseys and shorts. The purchase decision of new electronic cutting tool will increase the annual operating cost by 14082. However, the equipment will also enable the company to improve its batch size so that the packing cost of each batch reduces as a result of inclusion of more units in a single batch. The total reduction in the batch cost will be $ 507.43. Thus, it can be observed that the total cost of new equipment will exceed the benefits offered by it. Hence, it is not feasible for the company to purchase the new equipment otherwise the cost of producing each product will automatically increase. 

Reference

Hansen, D., Mowen, M. and Guan, L. 2007. Cost management: accounting and control 6^th ed. U.S: Cengage Learning.

Inman, M.L. 2014. Cost Accounting 1^st ed. U.K: Butterworth-Heinemann.

Zimmerman, J.L. and Yahya-Zadeh, M. 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.

APESB, 2010. APES 110 Code of Ethics for Professional Accountants. Available at: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf Accessed on 22.11.2018.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.

Granof, M.H., Platt, D.E. and Vaysman, I., 2000. Using activity-based costing to manage more effectively. PricewaterhouseCoopers Endowment for the Business of Government.