Management Accounting Report

Brent CaronJoey DecicioBridget MacCallum Damian RivelliFrancisco VelaBAD 2 – Section 4261Barbara Croteau3/12/15

Water Play, Inc.

Table of ContentsIntroduction................................................................................3Identifying Cost Categories........................................................3Bill of Materials.........................................................................................................3Labor Routing and Costs schedule............................................................................4Manufacturing Overhead Budget..............................................................................4Selling and General Administrative Expenses...........................................................5Discretionary Costs....................................................................................................5

Consolidated Income statement.................................................6Break-even Point........................................................................................................7Operating Leverage...................................................................................................7Margin of Safety........................................................................................................8

Comments on Projected Financial Performance........................8Appendices..................................................................................9A-1 Bill of Materials...................................................................................................9A-2 Labor Routing and Costs.....................................................................................9A-3a Manufacturing Overhead Budget....................................................................10A-3b Manufacturing Overhead Budget Categorized by Cost...................................10A-4a Selling and Administrative Expense................................................................11A-4b Selling and Administrative Expense Categorized by Cost...............................12A-5a Contribution Income Statement......................................................................12A-5b Contribution Income Statement Pie Chart......................................................12A-6 Break-even point, Operating Leverage, and Margin of Safety Calculations.....13

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Introduction

The analysis in this report focuses on the management reports and

accounts that provide accurate and timely financial and statistical

information that aid manager’s decision making for start-up company,

Water Play, Inc. This report will identify the different types of costs for the

annual budget period, as well as a prepared contribution format income

statement, which will show the amount available to cover fixed cost and

generate a profit. In addition, break-even point, operating leverage ratio,

and margin of safety will be calculated and analyzed. Next, two full set of

budgeted financial statements for the first year of operations such as the

income statement, statement of retained earnings, balance sheet, as well as

a cash budget will be prepared by using forecasted unit sales, which will

reveal potential strengths and weaknesses that will be analyzed. Lastly,

these budgeted financial statements will be compared and analyzed to the

actual financial statements, using the actual data for the first two quarters;

variances.

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Identifying Cost Categories

Bill of Materials

All the materials in the Bill of Materials document, refer to Appendix

A-1, are considered variable costs. Variable costs are those costs that vary

depending on a company's production volume; they rise as production

increases and fall as production decreases. They are also considered to be

direct costs, which can be completely attributed to the production of

specific goods or services. Lastly, all the materials are considered to be

product costs, which are the direct materials, direct labor, and

manufacturing overhead used in making its products in manufacturing

companies, because everything listed are direct materials used to create the

Shark Scout Vehicle.

Labor Routing and Costs schedule

All of the costs in the Labor Routing and Costs schedule, refer to

Appendix A-2, are considered to be variable costs since the amount of hours

to assemble the shark scout vehicle vary by how much the company decides

to sell. These costs are also direct and product costs, because these hours

are refer ton as direct labor towards the manufacturing of the product.

Manufacturing Overhead Budget

The costs in the Manufacturing overhead budget, refer to Appendix A-

3a, are both fixed and variable costs. Fixed costs are costs that do not

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change with an increase or decrease in the amount of goods or services

produced these costs are essentially expenses that have to be paid by a

company, independent of any business activity. These costs are also both

period and product costs. Period costs are non-manufacturing costs not

included as part of the cost of purchased goods nor manufactured goods.

These costs are also expensed straight to the income statement in the

period in which they are incurred. Lastly, they are both direct and indirect

costs. Indirect costs are Indirect costs are costs that cannot be accurately

attributed to specific cost objects. Refer to Appendix A-3b pertaining to the

different cost categories in the Manufacturing Overhead Budget.

Selling and General Administrative Expenses

The costs in the Selling and General Administrative Expenses, refer to

Appendix A-4a, are considered to be both fixed and variable costs. Every

cost is also categorized as a period costs, since these costs are not incurred

in the manufacturing process. Also for this reason, they are categorized as

indirect costs. Refer to Appendix A-4b pertaining to the different cost

categories in the Selling and General Administrative Expenses.

Discretionary Costs

Discretionary costs are costs that management has decided that can

be reduced in the short term. Advertising, as per a company decision, is a

discretionary cost because the company can decide how much they would

like to spend on promoting the company. Training, which is also up to the

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company, would be a discretionary cost because management makes the

decision on how much time they want to train their employees. Fringe

benefits are up to management because they make the decision to provide

benefits such as health insurance plans, retirement plans, and

hospitalization plans. As for research and development it would be

considered a discretionary cost because management also decides how

much they would like to spend on research in order to build their company.

The management team of this company has decided that for this year, none

of these costs fit under the discretionary cost category due to it being a

startup company. The company has no discretionary costs right now

because all of the costs that would typically be discretionary such as

advertising, training, fringe benefits, research and development, and sales

office supplies will be utilized as committed costs to ensure the company’s

growth for this first year.

Consolidated Income statement

A predicted contribution format income statement has been prepared

based on an expected production of 72,000 units annually, with a retail

price of $24,000 per unit. A contribution format income statement is a

statement in which all variable expenses are deducted from sales to arrive

at a contribution margin, from which all fixed expenses are then subtracted

to arrive at the net profit or loss for the period. This is an excellent form of

presentation, because the contribution margin clearly shows the amount

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available to cover fixed costs and generate a profit (or loss). Refer to to

Appendix 5a to view the contribution format income statement and refer to

to Appendix 5b to view a visual of how much variable expenses and fixed

expenses are deducted from sales to come up with a net income.

Break-even Point

The break-even point for the company is at 49,023 units produced,

which come out to $1,176,552,598 sales dollars. Break-even point is the

point of balance between making either a profit or a loss. To find the volume

of units to break-even, total fixed expenses is divided by the contribution

margin per unit. To find the sales volume at break-even, total fixed expenses

is divided by the contribution margin percent (percentage of the sales

price). Refer to appendix A-6 for these calculations. If the company manages

to sell the predicted 72,000 units in this next year, it will have made a profit

of $217,546,000. We trust in our data collection team that these numbers

are not fictional, but they are very well attainable.

Operating Leverage

The current Operating Leverage, which measures the correlation

between net operating income to a given percent change in sales, of 3.13 is

a low degree, making it less responsive to a change in sales. Refer to

Appendix A-6 for calculations. This means that the fixed cost is

comparatively low to the Sales. With a low Operating Leverage, there is a

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lower increase in Revenue because they have to increase those costs

proportionally to make those sales.

Margin of Safety

The current Margin of Safety in dollars is $551, 447, 401.77, which

calculates the “cushion” of sales before the break-even point will be

reached if sales decrease. Refer to Appendix A-6 for calculations. This

means that Water Play, Inc. is healthy and has a safe amount of profitable

sales that will cover all of the fixed and variable costs. The current Margin

of Safety in percent shows that 31.9% of sales are profitable appearing as a

positive net operating income.

Comments on Projected Financial Performance

Management should note that the projected financial performance of

the company is durable and profitable with the current cost structure

because of the Low Fixed Cost Structure. This Low fixed Cost Structure

means that the Break Even Point is low, while the Margin of Safety is high;

the Operating Leverage is low, which results in a lower risk with a large

cushion of safety in case sales decrease.

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Appendices

A-1 Bill of Materials

A-2 Labor Routing and Costs

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A-3a Manufacturing Overhead Budget

A-3b Manufacturing Overhead Budget Categorized by Cost

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A-4a Selling and Administrative Expense

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A-4b Selling and Administrative Expense Categorized by Cost

A-5a Contribution Income Statement

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A-5b Contribution Income Statement Pie Chart

A-6 Break-even point, Operating Leverage, and Margin of Safety Calculations

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