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Cost Information within a Business
In order to analyze costs information within a business, one will have to learn the key types of costs and identify the ways of reducing these costs whenever possible. It should be born in mind, though, that costs can be classified according to a range of principles. Traditionally, three classifications are distinguished, as Lal (2009) explains. The functional one presupposes splitting costs into direct (i.e., the ones that are related to the production process) and indirect (other costs) ones.
The behavioral approach declares that costs should be defined based on their susceptibility to outside factors; thus, fixed (unchangeable), variable (changeable), and semi-variable (ones depending on the situation) are typically identified. Finally, the control costs (controllable and uncontrollable ones) must be mentioned. Therefore, as far as the allocation of costs within the company is concerned, the following approach can be suggested:
Table 1. Costs Assessment.
The need for different costing methods when analyzing the current cost policy is obvious, as the adoption of several approaches will help view the issue from several perspectives. Job costing will be used in order to define whether the production process allows balancing between moderate costs and outstanding quality. Batch costing will be used in the company in order to evaluate the costs per each box of chocolate cookies sold. The process costing method will be utilized to access the expenses, which the introduction of new technology for baking has triggered. The mixed-method, in its turn, will allow for incorporating the three ones listed above into a single approach.
The costs will be calculated with the help of standard costing, which will allow for carrying out the corresponding correcting action, and the uniform costs, i.e., the comparison of the expected outcomes and the actual costs taken in the process of the company’s operations. The breakeven calculation will be used as the key tool for costs analysis, whereas the analysis of the company’s transactions and operational processes will be used for data collection. For example, the breakeven analysis will help identify the breakeven point per unit in the following scenario:
Table 2. Breakeven Calculation.
The information will be introduced to the audience as a PowerPoint presentation.
Costs Reduction and Values Enhancement within a Business
A careful analysis of the costs that the company takes, as well as the evaluation of the existing costs strategy, is essential for identifying the dents in the current policy and adjusting to the changing environment of the global economy. The cost report for the company in question will look the following way:
Table 3. Cost Report.
The calculation of productivity, efficiency, and effectiveness will be carried out with the help of the concepts known as the Earnings per Share Ratio, Price/Earnings Ratio, and Dividend Yield (Sarngadharan & Kumar 2011). The calculations will be carried out in the following manner:
Therefore, the EPS ratio for the Chocolate C. will equal $404,000/100,000=4.04. The specified ratio can be considered the key indicator of the company’s productivity. As far as the organization’s efficiency is concerned, the Price/Earnings Ratio (PER) should be considered as the key indicator. The specified indicator will be calculated in accordance with the following formula:
Therefore, the company’s PER will equal $3.50/$0.75≈4.67. Finally, the organization’s effectiveness can be assessed by calculating its Dividend Yield (DY); the latter can be defined with the help of the following formula:
Based on the formula suggested above, the DY of the company Chocolate Co. equals $1.20/$3.50≈0.34. The specified approach cab be considered rather efficient in analyzing the company’s performance in the financial environment. Moreover, it will help figure out whether the company is capable of complying with the values and principles that it has set.
Speaking of which, the significance of value and quality principles cannot possibly be underestimated when assessing the production process. As far as the organization in question is concerned, its key principles of quality and value are based on employing the latest technological advances and using the finest ingredients in order to attain high rates of customer satisfaction. Therefore, potential improvements can be made to the R&D department by increasing the number of costs for the designated field, at the same time cutting costs for some of the logistics processes. Specifically, the costs for the transportation process can be reduced significantly by choosing a different company for transporting supplies and final products.
Preparing Forecasts and Budgets for a Business
Budgeting is essential for an organization since it allows the company to not only allocate the existing costs and, thus, be able to retain its financial assets, but also to make sure that the organization should have an emergency stock of financial assets, which the firm can use in case of a sudden crisis or an unforeseen change of circumstances or the business environment.
The selection of the budgeting methods for the company in question will depend on a range of external and internal factors. Specifically, the company’s current assets, the strengths and the weaknesses, which the organization has, and the competition rates along with the market demand, will define the budgeting approach. It can be assumed that the company faces moderately favorable conditions now.
As a rule, budget methods are represented by cash budgeting (analysis of liquidity and cash flow), net present value assessment, analysis of the annual rate of return, payback technique (analysis of the company’s financial recovery), and the internal rate of return approach. In addition, two alternative types of budgeting are identified. These include incremental budgeting (the one that is created based on the current sum of the company’s financial assets with a certain amount added) and zero-based budgeting (i.e., the one that involves starting budgeting from scratch) (Mohana 2011). At present, the company will need to consider zero-based budgeting as the key measurement tool. The specified approach was chosen, as it will help the organization enter an entirely new market and search for new means of attracting new customers.
Table 4. Zero-based budgeting.
It should be noted, though, that a zero-based budgeting method is rarely used alone. Therefore, the calculation of the company’s cash budget is imperative for avoiding possible issues with the company’s financial transactions.
Table 5. Cash Budget.
The cash budget provided above shows that the organization is going to increase its costs due to the expected rise in the organization’s annual revenues. As the cash budget provided above shows, the company has enough financial assets to enter the global economy and evolve in new markets, attracting new customers. It should be noted, though, that the company will need to come up with a brand product that will help it gain popularity in the new environment.
Monitoring Performance against Budgets within a Business
In order to make sure that the organization meets the goals set and follows the budgeting approach adopted, one will have to incorporate certain budget monitoring strategies. Specifically, it will be required to make sure that the supplier payments are not delayed; otherwise, the company may face a considerable drop in the suppliers’ performance.
The budget variable of the company in question may be conducted by subtracting the budgeted amount of money from the sum that has actually been spent in the course of the organization’s functioning (Needles, Powers & Crosson 2013). To be more exact, the budget variance can be calculated in accordance with the formula below:
It should be noted that the organization will have to take the slightest chance of taking costs into calculating the possible total amount of expenses; thus, the firm will be prepared for any situation and will be capable of handling even the most complicated scenario possible. It was suggested that the Chocolate Co. should spend approximately $500,000 this year in the course of its operations, including not only the production processes but also the promotion, the possible investments, etc. A comparison to the actual costs ($404,000) shows that the organization is likely to retain an impressive amount of money at the end of the fiscal year. Therefore, the variance for the Chocolate Co. will equal
Thus, the actual amount of revenues acquired by the organization will make $96,000, which is a rather impressive sum of money. The revenue acquired in the process of the company’s operations may also be expressed in percentages:
In other words, the company will receive a 23.76% income from its operations in the course of the specified fiscal year.
Also known as the income statement, the operating statement is an essential part of the budgeting process. The key goal of the operating statement is to provide a detailed account of the operating results of the company over a specific period of time and to give an insight on the further avenues of the company’s financial operations.
Table 6. Operating Statement.
Recommendations
Introduction
The table displays the difference between the planned budget and the actual one in a very graphic way.
Summary
While some of the costs remained fixed (e.g., the rent), others were altered significantly due to a range of internal and external factors. Specifically, the costs for technology deserve to be mentioned; because of the recent innovations in the designated area, the necessity to acquire new and more efficient equipment arose. As a result, the costs rose from $65,000 to $90,000. In addition, the promotion campaign turned out to be more costly than expected.
Methods
The means for promoting the change include reducing the costs for transportation and the related processes. In addition, a stronger emphasis on R&D is put.
Results
The method used in order to increase the company’s net balance worked quite well, leading to a 103.4375% increase in the net revenue.
Discussion
As the analysis provided above shows, the cost center should be chosen as the key responsibility center for the organization to report on its key processes and changes to the corresponding authorities. Hence, the need to provide a detailed costs report emerges. Therefore, the significance of cutting some of the expenses for the logistics strategies needs to be emphasized. Specifically, the costs for certain processes, such as the transportation of supplies, raw materials, finished goods, etc., need to be reduced.
Reference List
Lal, J 2009, Cost accounting, 4th edn, Tata McGraw-Hill Education, New Delhi, India.
Mohana, R P 2011, Financial statement analysis and reporting, PHI Learning, New Delhi, India.
Needles, B, Powers, M & Crosson, S 2013, Financial and managerial accounting, Cengage learning, Stamford, CT.
Sarngadharan, M & Kumar, R S 2011, Financial analysis for management decisions, PHI Learning, New Delhi, India.
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