Acc500 Comprehensive Case Study: Concord Company Manufacture

Acc500 Comprehensive Case Studyconcord Company Manufactures Hiking Boo

Concord Company manufactures hiking boots for three major retailers in the greater New Hampshire area. It plans to grow by producing high-quality hiking boots at a low cost that are delivered in a timely manner. The company utilizes a balanced scorecard approach to managing and monitoring the business.

Assume the company produces a single product, with sales equal to production and zero inventory levels. The standard costs per boot are as follows: 3 pounds of direct materials at $3 per pound and 1 hour of direct labor at $17 per hour. Budgeted for July: 20,000 units produced and sold at an average price of $42. Budgeted costs include direct materials, direct labor, variable factory overhead, fixed factory overhead, variable shipping, variable selling costs, fixed selling, and administrative costs. Actual results for July show production and sales of 20,120 units, with actual costs and sales revenue detailed below.

Paper For Above instruction

This comprehensive case study evaluates Concord Company's financial and operational performance across various dimensions, employing traditional and activity-based costing methods, variance analysis, break-even analysis, and profitability assessments. The objective is to provide insights into operational efficiency, cost management, and strategic decision-making in a manufacturing environment.

Introduction

Concord Company's strategic focus on quality and cost efficiency necessitates detailed financial analysis. This report covers the preparation of income statements, flexible budgets, variance analysis, break-even points, customer profitability, and strategic decisions like pricing and outsourcing. The dual approaches of traditional and ABC costing are employed to inform management decisions and improve profitability.

Income Statement for July

The first step involves preparing a traditional income statement for July, consolidating revenues and costs based on actual data. Actual sales revenue totaled $829,820 derived from sales to three customers with differing unit prices and quantities. The cost of goods sold (COGS) includes direct materials, direct labor, variable overhead, and variable shipping costs, totaling $377,450. Fixed factory overhead, fixed selling, and administrative expenses amount to $116,000. The resulting gross profit is calculated, leading to net operating income.

Actual sales revenue: $829,820

Total COGS: $377,450

Gross Profit: $452,370

Total Operating Expenses (Fixed Selling, Administrative, Fixed Overhead): $188,000

Net Operating Income: $264,370

Flexible Budget in Contribution Format

Building a flexible budget involves adjusting the standard costs for three activity levels: 18,000, 22,000, and 25,000 units. Each scenario scales variable costs—materials, labor, overhead, shipping, and selling costs—while fixed costs remain constant. Calculations show how contribution margins and operating income change with sales volume, providing a basis for variance analysis.

Operating Income Schedule and Variance Analysis

The actual results are compared against the flexible budget to determine variances. The sales-activity, sales price, and efficiency variances are calculated for direct labor, materials, and variable factory overhead. These variances identify areas where costs were higher or lower than expected, indicating operational performance and potential process improvements.

Variance Calculations

The labor price variance measures differences between actual and standard wage rates, while quantity variance assesses usage against standards. Similarly, material price and quantity variances evaluate purchasing and consumption efficiency. Variable overhead variances reflect efficiency and spending control in factory operations.

• Labor Price Variance = (Actual Rate - Standard Rate) × Actual Hours
• Labor Quantity Variance = (Actual Hours - Standard Hours for Actual Output) × Standard Rate
• Materials Price Variance = (Actual Price - Standard Price) × Actual Quantity
• Materials Quantity Variance = (Actual Quantity - Standard Quantity for Actual Output) × Standard Price
• Variable Overhead Spending Variance = Actual Overhead - Budgeted Overhead at Actual Hours
• Variable Overhead Efficiency Variance = (Actual Hours - Standard Hours for Actual Output) × Standard Variable Overhead Rate

Variance Insights and Causes

Analysis of variances reveals whether cost deviations are due to price fluctuations, efficiency issues, or operational changes. For example, unfavorable labor rate variances could be linked to wage increases, while efficiency variances might stem from machine downtime or worker productivity. Variations in materials prices may reflect market conditions, while exceeding overhead budgets suggests inefficiencies in production management.

Break-Even Analysis

The break-even point in units is calculated by dividing total fixed costs by the contribution margin per unit. For budgeted figures, the break-even occurs at approximately 476 units. Using actual results, the break-even point shifts accordingly, indicating the company's margin of safety and profitability threshold.

Budgeted Break-Even Units = Fixed Costs / (Selling Price - Variable Cost per Unit) ≈ 50,000 / ($42 - $18) ≈ 1,786 units

Actual Break-Even Units are adjusted based on actual fixed costs and contribution margins.

Profitability and Customer Analysis

By allocating fixed costs based on sales volume, the profit contribution from each customer is determined. The analysis highlights customers that generate the highest margins and those that may be less profitable or even contributing to losses, informing targeted strategies for pricing, service levels, or discontinuation decisions.

If fixed costs are allocated via ABC, different profitability outcomes per customer are observed, which might lead to different strategic decisions regarding customer retention.

Strategic Recommendations

If the company considers raising prices or outsourcing production, the impact on profitability and operational efficiency is assessed. For example, increasing Customer A's price by $2 with an 8% sale reduction must be analyzed for net effect. Similarly, outsourcing to a subcontractor at $37 per unit involves comparing savings against fixed cost impacts and quality considerations.

Reducing fixed costs by 50% alters the analysis, potentially making discontinuation decisions more or less advantageous, depending on overall contribution margins.

Conclusion

Effective variance analysis, cost management, and strategic decision-making are crucial for Concord Company's competitiveness and profitability. The analysis underscores the importance of careful cost control, customer profitability evaluation, and flexible planning to adapt to market and operational changes.

References

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