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Company Overview
Goodwill LLC is a limited company operating in the pet industry. The company manufactures pet collars, leashes, and harnesses to improve pet management and has been in operation for one month. Evaluation is critical to determine whether or not the business is making profits. The key activities performed in the company are purchasing raw materials, preparing essential components, and sewing pet products. Other overheads in the company include advertising and product promotion. The companys vision is to expand to be one-stop pet merchandise where all pet products will be manufactured.
Purpose of the Project Investor Report
The corporate domain is dynamic, and consistent data-driven decisions must be made to ensure the business is profitable. This report analyzes how the principles of managerial accounting are essential in the companys day-to-day running. The purpose of the information is, therefore, to analyze the costing system used for Goodwill LLC and how the prices set for the products are quintessential for profits to be achieved. The information in the report is vital because it enables the management and investors to make crucial decisions regarding the business.
Management Accounting Methods Used To Generate Information
Setting the price for products generated in a company requires special consideration of all the costs incurred to produce the unit of the product sold. Marginal analysis is a managerial accounting method used to analyze and determine additional benefits in terms of price for the units produced (Labro, 2019). The method is critical in determining the profitability of the activities conducted in the organization. In Goodwill LLC, for example, marginal analysis is used to calculate the cost required to produce the pet products and compare it to the final prices of the pet collars, leashes, and harnesses. The business is considered profitable if the selling price is more than the cost used to produce it. The job order costing system is another important method used to determine the commoditys price based on the independent components used to produce the product. The marginal analysis and job order costing system are essential methods used in Goodwill LLC to ensure that the price set guarantees success in the business.
Financial Strategy
Costing Systems
A costing system is a designated approach in accounting that monitors the costs incurred by a business and uses it to set the cost of a product. An appropriate costing system should therefore account for all resources used to manufacture a product to ensure that the price set for the commodity can help the business break even and make profits. The job order costing system is the best method because it ensures that all costs are considered when determining the price (Labor, 2019). The prices of pet collars, leashes, and harnesses are determined by the costs of material, labor, advertisement, and other administrative costs. The process control system is another method that calculates production costs as an aggregate of the entire process. The process costing system is more beneficial for large productions.
Selling Price and Contribution Margin
Cost volume profit (CVP) analysis is a holistic approach in business management that examines the relationship between fixed costs, variable costs, the number of products sold, and production prices. The factors that contribute to profits in a business are included in an equation that can be used to determine the profits and hence decide whether the business is performing well (Bhimani, 2020). The main benefit of the CVP is that it helps determine how each relevant cost is covered. The CVP formula is given as follows:
Assuming that 5000 units of pet collars, leashes, and harnesses are to be manufactured in the month, and a profit of $1000 is to be generated, the cost of each item can be calculated using the equation. The contribution margin is calculated by deducting the variable cost from the selling price per unit.
Leash Price and Contribution Margin
Harness Price and Contribution Margin
Pet Collar Price and Contribution Margin
Break-Even Points for Achieving Different Target Profits
The breakeven point is achieved in the accounting realm when a companys production cost equals the revenue collected. Goodwill LLC has two targets for the products produced. The monthly target profit for a pet collar, harness, and lash is $300, $320, and $380, respectively. The second set of profits for the three products is $500, $500, and $500, respectively.
Break Even Point = Fixed Cost / Sales price per unit Variable cost per unit
The variable price for the three products, as calculated above, are $9.10, $14.60, and $12.10 for the pet collar, harness, and lash, respectively. However, each profit level is achieved by different sales per unit.
Pet Collar Breakeven point for achieving 1st Target Profit
Leashes Breakeven point for achieving 1st Target Profit
Harness Breakeven point for achieving 1st Target Profit
Applying the same procedure to the new breakeven points for the three products are 3270, 2770, and 2600 units for pet collars, leashes, and harnesses. Profit is inversely proportional to the breakeven point for a business. The management must set a higher profit margin and devise ways to improve sales.
Financial Statements
Goodwill LLC requires the initial capital required to purchase the materials, the equipment required for sewing, and the labor charges for the people. Therefore, at the beginning of the business, the company set aside resources for material, labor, and equipment, as shown in table 1. The total amount required to produce the goods was $28,258.33.
Table 1. Statement of the Cost of Goods Sold.
Goodwill LLC operated for a month, and the sales of the goods amounted to $37,680 as shown in table 2. Since the revenue generated is more than the cost of the goods sold, the business may be said to be profitable, and investors must put more into expanding the business. The company realized a 23.43% profit, proving that the business is profitable and investors can put in resources.
Table 2. Income Statement.
Table 3. Variances for labor and materials.
Significance of Variance
Table 3 shows the differences between the budgeted amount and the actual amount used to produce the pet products. Variance is the difference between the actual cost and the budgeted amount. The significance of the variance shows that the business operates above what has been budgeted for and, therefore, must be revised to allocate more resources and time for success in the venture.
References
Labor, E. (2019). Costing systems. Foundations and Trends® in Accounting, 13(3-4), pp. 267404. Web.
Bhimani, A. (2020). Digital data and management accounting: why we need to rethink research methods. Journal of Management Control, 31(1), 923. Web.
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