Phoenix Company’s 2019 Master Budget Included The Following

Phoenix Company’s 2019 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units

Classify all items listed in the fixed budget as variable or fixed. Also determine their amounts per unit or their amounts for the year, as appropriate. Identify the unit variable costs in the format of variable costing, according to your findings. Organize a template for variable costing income statements in which the sales volume is a variable. Test your template for 15,000 units sales volume to verify if it produces the same income as the original report. Find the breakeven point and provide the income statement at that point. Also, prepare income statements at sales volumes of 12,000, 14,000, 16,000, and 18,000 units. Provide a general discussion on the predetermined variable overhead criterion and its possible dependence on the activity for which it is used. Additionally, develop a variable costing income statement with variable overhead divided among different activities, each with its own predetermined variable overhead criterion. Explain your example in detail, including the initial situation and assumptions, supported by in-text citations. Use at least five credible references, including the textbook as a primary source of data.

Paper For Above instruction

Under the umbrella of managerial accounting, understanding the distinctions between fixed and variable costs is crucial for accurate budgeting and cost control. The Phoenix Company’s 2019 master budget provides an excellent case study for classifying costs, calculating per-unit figures, and constructing flexible income statements, particularly through the lens of variable costing methods. This paper will analyze the fixed budget report, classify each item, identify unit costs, and develop a flexible income statement template, followed by breakeven analysis and volume-based income statements. Additionally, it will discuss the implications of predetermined variable overhead rates and their dependence on activity levels, especially when overhead costs are allocated across multiple activities with differing overhead criteria.

Beginning with the classification, the fixed budget items can be categorized into fixed costs, such as depreciation, rent, or salaries that do not fluctuate with production volume, and variable costs, such as direct materials and direct labor that change with units produced. For example, if the budget includes fixed factory overhead or administrative expenses, these are considered fixed, whereas direct materials per unit are variable. Each item’s totals for the year or per unit are calculated by dividing total fixed costs by estimated output or assigning variable costs per unit directly from the budget data. This classification enables the development of a flexible budgeting framework that can adapt to differing sales volumes.

In the context of variable costing, unit variable costs are vital for marginal analysis and decision-making. These costs include direct materials, direct labor, and variable manufacturing overheads, which are summed to compute the contribution margin per unit. Accurate identification of unit variable costs facilitates the creation of a flexible income statement, which adjusts total variable costs in proportion to sales volume. Testing this template at the 15,000 units sales volume ensures consistency with the original fixed budget income statement, confirming the accuracy of the variable costing approach (Garrison, Noreen, & Brewer, 2018).

The breakeven point, where total revenue equals total expenses, can be computed using the contribution margin approach. Specifically, dividing fixed costs by the contribution margin per unit yields the breakeven sales volume. An income statement prepared at the breakeven point will show zero net income, illustrating the sales volume at which the company neither profits nor incurs losses. Analyzing sales at 12,000, 14,000, 16,000, and 18,000 units provides insights into how profitability changes with volume and assists in strategic planning (Drury, 2018).

The discussion of predetermined variable overhead rates hinges on their dependence on specific activities. When overhead costs are allocated based on activity levels—such as machine hours or labor hours—the rates must be established in advance to facilitate cost control and pricing decisions. These predetermined rates assume a certain level of activity; deviations from this assumption can affect cost accuracy. When overhead costs are divided among activities, each with its own rate, meticulous tracking of activity levels becomes essential to maintaining costing accuracy. For example, allocating more machine hours to a particular activity with a fixed predetermined rate can lead to over- or under-applied overhead, which must be adjusted periodically (Horngren, Sundem, Stratton, & Schatzberg, 2018).

In developing a variable costing income statement with multiple activities, each activity’s variable overhead is associated with its respective predetermined rate. This approach enhances costing precision and managerial control by enabling detailed analysis of each activity’s efficiency. For example, if the production process involves activities like setup, machining, and inspection, each can have its own predetermined overhead rate based on activity drivers like setups or machine hours. A detailed explanation involves allocating variable overheads proportionally to each activity’s actual use, calculating activity-specific contribution margins, and analyzing variances to identify efficiencies or inefficiencies. Supporting this complex allocation process requires robust data collection and analysis, often facilitated by activity-based costing (Kaplan & Anderson, 2004).

In conclusion, mastering the classification of costs, flexible budgeting, and activity-based allocation using predetermined overhead rates enhances managerial decision-making. This comprehensive approach supports strategic initiatives such as pricing, product mix, and cost control, ultimately contributing to the company’s profitability and competitiveness. To ensure the accuracy of these methods, ongoing review and adjustment of overhead rates, as well as continuous monitoring of activity levels, are essential. By integrating these practices into managerial accounting, businesses can achieve greater clarity and control over their financial performance.

References

• Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Horngren, C. T., Sundem, G. L., Stratton, W. O., & Schatzberg, J. (2018). Introduction to Management Accounting (16th ed.). Pearson.
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