Step 5: Budget Your CEO Has Asked You To Prepare A Productio

Step 5 Budgetyour Ceo Has Asked You To Prepare A Production Cost Budg

Step 5: Budget your CEO has asked you to prepare a production cost budget for the MiniY for May 20X8. The actual costs in April 20X8 were: MiniY: Production Cost Budget April 20X8 Production–Units of MiniY 3,000 Components cost (variable) 24,000,000 Labor cost (variable) 13,500,000 Rent (fixed) 6,000,000 Depreciation (fixed) 6,000,000 Other (fixed) 2,000,000 Total $51,500,000 For the month of May, the number of MiniY produced will increase to 3,200, reflecting an anticipated sales increase related to a new marketing campaign. Question 5: Using the above information, prepare a budget for May 20X8 stating the total cost. Use a spreadsheet to display your data and calculations. Before starting your calculations, review materials on integrating accounting and financial information. Submit your Production Cost Budget Report and Calculations to the dropbox below. Be sure to show your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company. Before you submit your assignment, review the competencies below, which your instructor will use to evaluate your work. A good practice would be to use each competency as a self-check to confirm you have incorporated all of them in your work. · 3.1 Identify numerical or mathematical information that is relevant in a problem or situation. · 3.2 Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution. · 3.3 Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data. · 3.4 Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making. · 10.5 Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions. A budget is an estimate of income and expenditures for a selected period of time. In this section of your project, you are going to work on creating a production cost budget. When evaluating the costs used for budgeting, there are various cost behavior patterns which will impact the budgeting of the costs at various production levels. The following are the most common: Variable costs: Costs that change in proportion to changes in production volume. For example, the cost of materials used in the production of the product. Fixed costs: Costs that do not change in response to changes in activity levels. For example, the depreciation cost associated with owning a machine used in the production process. Mixed costs: Costs that contain both a variable element to cost and a fixed element to the cost. For example, an employee may receive a salary plus commissions. Step Costs: Costs that remain fixed for a range of volume but then increase to a higher cost once a threshold is exceeded. For example, a third shift is being added to handle the increased production level, requiring the addition of a salaried supervisor for the new shift. The most important step in coming up with a cost budget is properly identifying which behavior type each cost displays so that it can be properly budgeted. Once you have identified which category the identified cost belongs, you can then estimate how that cost would vary (if at all) based on the projected production level. Now, the production cost budget can be prepared based on the production level and the behavior patterns of the associated costs. Example 1: You are given the following costs from last month based on a production level of 800 units. Based on the production level increasing to 1,000 units for this month, determine the production cost budget for next month: Cost Detail Cost Behavior Material $ 50,000 Variable Direct labor $ 20,100 Variable Depreciation $ 8,000 Fixed Supervisor salaries $ 22,000 Fixed Indirect materials $ 620 Variable Rent $ 5,500 Fixed Total $ 106,220 Work: For costs that vary based on the production level, we will divide the original cost by the original production level to get a cost per unit. Then we can calculate the cost for the current budget by multiplying the cost per unit by the new production level. Fixed costs do not vary, so they would remain the same for the current production cost budget Orignal Units 800 Current Budget Units 1,000 Cost Detail Cost Behavior Cost per Unit Budgeted Costs Material $ 50,000 Variable $ 62.50 $ 62,500 Direct labor $ 20,100 Variable $ 25.13 $ 25,125 Depreciation $ 8,000 Fixed N/A $ 8,000 Supervisor salaries $ 22,000 Fixed N/A $ 22,000 Indirect materials $ 620 Variable $ 0.78 $ 775 Rent $ 5,500 Fixed N/A $ 5,500 Total $ 106,220 $ 123,900 Based on a production level of 1,000 units, the budgeted costs would be $123,900 for the month. The profit-maximizing level of output is achieved when the marginal revenue is equal to its marginal cost. In other words: MC = MR Let’s start by familiarizing ourselves with marginal revenue and marginal cost: Marginal revenue is defined as the addition revenue that is generated by increasing product sales by one additional unit of output. Marginal revenue is calculated by dividing the change in total revenue by the change in total output quantity. Marginal cost is defined as the change in the total cost that results from producing one additional unit. Total costs will include all costs associated with the additional production including labor, materials, and overhead. As fixed costs do not vary based on production level, the variable costs will be where the changes in marginal cost are seen. A company is considered to be perfectly competitive when the equality of marginal costs and marginal revenue is reached. In other words, this means that the production level has been reached where profits have been maximized. This concept may be a little confusing as this equation may make it appear that the company is earning nothing if the marginal revenue equals the marginal cost. However, this is not the case. The company is looking at increasing production by one more unit. Let’s assume that the increased unit proves to be profitable (the increase in revenue is greater than the increase in cost). Now, the company will evaluate increasing production by an additional unit, and so on. This increase in production continues until the company reaches a level where the latest unit added does not add profit. This is the point where marginal costs equal marginal revenue and it no longer makes sense to increase production by that single unit. Example 1: You are given the following for Marginal Cost and Marginal Revenue. Based on the information provided, at what level of output Q would profit be maximized? MC = 20 Q – 120,000 MR = 250 Q – 240,000 At what level of output Q is the profit maximized? Using MC = MR we setup the problem as follows: 20 Q – 120,000 = 250 Q – 240,,000 = 230 Q Q = 120,000 / 230 Q = 522 Alternatively, this concept can be applied in a situation where you are given a varying number of units along with corresponding variable costs per unit and sales price per unit. Based on that information, you can then evaluate the number of units that would maximize profits. Profits are evaluated based on the following equation: P x Q – VC x Q where P is sales price per unit, Q is the number of units, and VC is the variable cost per unit. As previously noted, fixed costs would not change based on quantity, so it is not included in this calculation. Let’s work through an example that evaluates profit-maximizing output from this perspective. Example 2: Your company estimates variable costs and price per unit based on the following levels of production. Based on this information, what level of production would you recommend? Number of Units Variable Cost per Unit Sales Price Per Unit 9,000 $120 $,000 $115 $,000 $110 $,000 $105 $,000 $100 $190 Using P x Q – VC x Q we calculate the following for each level of units produced: Number of Units Variable Cost per Unit Sales Price Per Unit Profit 9,000 $120 $240 $1,080,,000 $115 $230 $1,150,,000 $110 $220 $1,210,,000 $105 $200 $1,140,,000 $100 $190 $1,170,000 Analyzing the profit at each level of units, we find that 11,000 units produces the maximum profit for the company. As a result, it is recommended that 11,000 units be produced by the company. Step 4: Choose the Profit-Maximizing Output Level The CEO's next question is, "What level of output would be required to maximize our profit on the Android01?" You have calculated the variable cost-per-unit for different levels of production. From market research, you have a schedule of prices for these levels. The information is summarized in the table below: Number of Units Variable Cost-per-Unit ($) Sale Price-per-Unit ($) ,,,,,,,,,,000 A recommendation on output could affect everyone in the company, from management to sales, to the floor manager and assembly line workers! You don't want to get this one wrong so you take some extra time to proof your calculations. Question 4: Based on profit-maximization analysis, what level of output should you recommend to the CEO? Before starting your calculations, review materials on profit maximization output. Submit your Profit-Maximization Output Report and Calculations to the dropbox below. Be sure to show your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of the company. Before you submit your assignment, review the competencies below, which your instructor will use to evaluate your work. A good practice would be to use each competency as a self-check to confirm you have incorporated all of them in your work. · 3.1 Identify numerical or mathematical information that is relevant in a problem or situation. · 3.2 Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution. · 3.3 Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data. · 3.4 Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making. · 10.5 Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions

Paper For Above instruction

The task of preparing a production cost budget requires careful analysis of historical costs, understanding of cost behavior patterns, and application of managerial accounting principles. For the upcoming month of May 20X8, the focus is on estimating the total production costs for MiniY, considering changes in production volume and associated cost behaviors. Based on the April 20X8 data, which recorded a production of 3,000 units at a total cost of $51,500,000, the company plans to increase production to 3,200 units, a projected rise attributable to a new marketing campaign aimed at boosting sales. This report details the step-by-step process of creating the budget, including variable and fixed costs, and offers strategic recommendations based on the analysis.

Understanding Cost Behavior and Budgeting Dynamics

Cost behavior analysis is fundamental to effective budgeting. Variable costs, such as components and labor, fluctuate directly with production volume. Fixed costs, like rent and depreciation, remain constant regardless of output levels, while mixed costs contain elements of both. Identifying each cost's nature enables accurate prediction of total costs and efficient resource allocation. For example, in April, components cost $24 million for 3,000 units, resulting in a variable cost per unit of $8,000 ($24,000,000 / 3,000). Similarly, labor costs of $13.5 million equate to $4,500 per unit.

Calculating Variability and Fixed Costs for May

To develop the budget for 3,200 units, fixed costs such as rent ($6 million), depreciation ($6 million), and other fixed expenses ($2 million) are held constant, totaling $14 million. Variable costs are adjusted proportionally, based on per-unit costs determined from April. Components cost per unit: $8,000; labor cost per unit: $4,500. Multiplying these by 3,200 units yields $25.6 million for components and $14.4 million for labor, respectively.

The total variable costs for May become:

• Components: $8,000 x 3,200 = $25,600,000
• Labor: $4,500 x 3,200 = $14,400,000

The total fixed costs remain at $14 million, leading to overall costs:

• Total variable costs: $25,600,000 + $14,400,000 = $40 million
• Total fixed costs: $14 million
• Total production costs for May: $40 million + $14 million = $54 million

This budget indicates that the expected total cost for producing 3,200 units in May is approximately $54 million. Comparing this with the April costs allows assessment of cost efficiency and planning margins. The detailed spreadsheet calculations facilitate transparent review and enable scenario analysis for optimal resource deployment.

Strategic Implications and Recommendations

By accurately projecting production costs, management can determine appropriate pricing strategies, analyze profit margins, and allocate resources effectively. Given the increased production volume, it is advisable to monitor variable costs closely to identify potential efficiencies, negotiate better input prices, or explore process improvements. Additionally, fixed costs should be scrutinized to find opportunities for savings, such as renegotiating lease terms or optimizing asset utilization. The comprehensive budget serves as a vital tool for making informed strategic decisions aligned with anticipated sales growth.

Conclusion

The budget for May 20X8, reflecting increased production, forecasts total costs around $54 million, considering variable and fixed cost components. This estimate provides a foundation for pricing decisions, profitability analysis, and operational planning. Proper integration of cost behavior understanding and managerial accounting principles ensures that the budget is both accurate and actionable, supporting the company's strategic goals for growth and efficiency.

References

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