9-2 Final Project- Memo to Management

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Southern New Hampshire University *

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550

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Accounting

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Apr 3, 2024

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1 9-2 Final Project: Memo to Management Sherry Gerges Southern New Hampshire University ACC 550: Cost Accounting Brian McCloskey February 11 th , 2024
2 Memorandum To: President and Board From: Sherry Gerges, CFO of the Hampshire Company Date: February 11 th , 2024 Subject: Memo to Management In this memo, I will be describing the overall findings of my analysis including the key elements that you, as management, should be aware of. I will also make a recommendation to you based on my cost accounting analysis that will enhance business planning. Lastly, I will recommend a performance tool to you based on my cost accounting analysis that will improve our business operations for the Hampshire company. Findings In the past few months, my team was asked to conduct a cost-volume-profit analysis, investigate inventory management and benchmarking, and identify an alternative costing method. Cost-Volume-Profit Analysis Based on the Cost-Volume-Profit analysis, we found that the Hampshire company has a net income of $94,475 and a contribution margin of $6.50 which shows that the contribution margin ratio is 52%. We also found that the margin of safety percentage is 24%. With this information, we were able to calculate what would happen if the company had an increase in sales in 2015 by 20% and how that would affect us. We were also able to identify if the company would be profitable if they took on a new order from a tour company in England that was inquiring about purchasing a large number of umbrellas for a discounted rate to see if our
3 company would still be profitable. Based on our findings, was were able to conclude that the Hampshire company will have $33,500 additional in operating income if they agree to sell the extra umbrellas to the tour company. Inventory Management/Benchmarking In this section, we were given the task of preparing a variable costing income statement and an absorption costing income statement. After preparing these two statements, we were able to conclude that if the Hampshire company were to use the absorption costing method, their ending operating income would be $54,000 more than if they used the variable costing method. We were also asked to calculate the price variances for material and labor to see if there are favorable or unfavorable. We found that the Hampshire company ended up paying $1.25 for cloth instead of the standard $1.15 which is a $0.10 difference. This caused a $12,800 variance which was unfavorable for the company. Alternative Costing Method In the last analysis, we were asked to compare the traditional costing method to the activity-based costing method (ABC). With the traditional costing method, we found the Hampshire company is currently profiting $1.58 per stick umbrella and $2.88 per collapsible umbrella. If the Hampshire company were to use the ABC method, we see that the profit for the collapsible umbrella would be $0.14 and for the stick umbrella, it would be $1.71. Business Planning Based on all these calculations, there are a few recommendations I have for management. The first recommendation is for the Hampshire company to use the Just-In-Time Method to be able to properly forecast the production for the coming year. Another recommendation I have would be for the Hampshire Company to start phasing into using the Activity Based Costing
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4 Method because it is a more accurate method compared to the traditional costing method. With these recommendations, the Hampshire company will be able to better plan for the coming year and calculate the appropriate amount of inventory they should have. Business Operations By implementing the Just-in-Time method and the Activity-Based Costing Method, Hampshire Company will be on its way to ensuring that it is properly forecasting the production for the coming year and ensuring that the inventory is being sold. To be able to improve business operations, the Hampshire Company can try to find a system that they can implement that can properly calculate the actual cost of material and labor to ensure that it is closest to the standard. This would help prevent the company from having unfavorable variances. In conclusion, I hope these recommendations are useful and the Hampshire Company can implement them to continue to grow, succeed and be profitable.