|
Month |
No of Days |
|
|
|
Total Cakes |
(1) Oven electricity usage (kwh) |
(2)Other electricity usage (kwh) |
(3) Total electricity usage (kwh) |
|
Cake 1 |
Cake 2 |
Cake 3 |
||||||
|
1 |
31 |
5,700.00 |
1,900.00 |
1,900.00 |
9,500.00 |
12,825.00 |
250.00 |
13,075.00 |
|
2 |
28 |
5,280.00 |
1,760.00 |
1,760.00 |
8,800.00 |
11,880.00 |
249.00 |
12,129.00 |
|
3 |
31 |
4,500.00 |
1,500.00 |
1,500.00 |
7,500.00 |
10,125.00 |
261.00 |
10,386.00 |
|
4 |
30 |
3,900.00 |
1,300.00 |
1,300.00 |
6,500.00 |
8,775.00 |
337.90 |
9,112.90 |
|
5 |
31 |
4,320.00 |
1,440.00 |
1,440.00 |
7,200.00 |
9,720.00 |
489.00 |
10,209.00 |
|
6 |
30 |
4,500.00 |
1,500.00 |
1,500.00 |
7,500.00 |
10,125.00 |
607.20 |
10,732.20 |
|
7 |
31 |
4,920.00 |
1,640.00 |
1,640.00 |
8,200.00 |
11,070.00 |
638.40 |
11,708.40 |
|
8 |
31 |
4,980.00 |
1,660.00 |
1,660.00 |
8,300.00 |
11,205.00 |
697.50 |
11,902.50 |
|
9 |
30 |
5,100.00 |
1,700.00 |
1,700.00 |
8,500.00 |
11,475.00 |
480.00 |
11,955.00 |
|
10 |
31 |
5,400.00 |
1,800.00 |
1,800.00 |
9,000.00 |
12,150.00 |
337.90 |
12,487.90 |
|
11 |
30 |
5,640.00 |
1,880.00 |
1,880.00 |
9,400.00 |
12,690.00 |
246.00 |
12,936.00 |
|
12 |
31 |
6,000.00 |
2,000.00 |
2,000.00 |
10,000.00 |
13,500.00 |
400.00 |
13,900.00 |
|
Total |
365 |
60,240.00 |
20,080.00 |
20,080.00 |
100,400.00 |
135,540.00 |
4,993.90 |
140,533.90 |
( Minnis & Sutherland, 2017).
|
Electricity provider 1 |
||
|
Monthly Usage (Kwh) |
Price (Cents) |
Amount ($) |
|
3350 |
29.8 |
998.30 |
|
5500 |
30 |
645.00 |
|
5500 |
30.01 |
40,523.67 |
|
|
|
42,166.97 |
|
Supply charges @ $4.012 per day |
|
1,464.38 |
|
Total |
|
43,631.35 |
|
Electricity provider 2 |
||
|
Monthly Usage (Kwh) |
Price (Cents) |
Amount ($) |
|
2550 |
29.55 |
753.53 |
|
5500 |
29 |
855.50 |
|
5500 |
28.75 |
38,822.25 |
|
|
|
40,431.27 |
|
Supply charges @ $5 per day |
|
1,825.00 |
|
Total |
|
42,256.27 |
It could be inferred the provider 2 of electricity is providing electricity cheaper than electricity provider 1 (Healy & Palepu, 2012).
|
Months |
Total cakes |
Total Electricity Cost including supply charge |
Rent |
Other expenses |
Direct Material Cost |
Direct Labor Cost |
|
1 |
9800 |
3,941.84 |
2,500.00 |
8,000.00 |
4,900.00 |
29,400.00 |
|
2 |
8000 |
3,654.86 |
2,500.00 |
6,000.00 |
4,000.00 |
24,000.00 |
|
3 |
7000 |
3,168.75 |
2,500.00 |
5,500.00 |
3,500.00 |
21,000.00 |
|
4 |
6500 |
2,797.73 |
2,500.00 |
7,500.00 |
3,250.00 |
19,500.00 |
|
5 |
7200 |
3,117.86 |
2,500.00 |
7,536.00 |
3,600.00 |
21,600.00 |
|
6 |
7000 |
3,263.28 |
2,500.00 |
9,565.00 |
3,500.00 |
21,000.00 |
|
7 |
8000 |
3,548.94 |
2,500.00 |
9,676.00 |
4,000.00 |
24,000.00 |
|
8 |
8300 |
3,604.74 |
2,500.00 |
10,007.00 |
4,150.00 |
24,900.00 |
|
9 |
8500 |
3,614.84 |
2,500.00 |
7,589.00 |
4,250.00 |
25,500.00 |
|
10 |
9000 |
3,773.05 |
2,500.00 |
6,700.00 |
4,500.00 |
27,000.00 |
|
11 |
9500 |
3,896.88 |
2,500.00 |
9,900.00 |
4,750.00 |
28,500.00 |
|
12 |
10000 |
4,179.03 |
2,500.00 |
10,000.00 |
5,000.00 |
30,000.00 |
|
Total |
98800 |
42,561.80 |
30,000.00 |
97,973.00 |
49,400.00 |
296,400.00 |
(Needles & Crosson, 2007).
This above given excel file provide use of IF functions which is based on the logics The excel file prepared as shown above incorporates the use of IF Function which works based on logics. This will be used to determine the best electricity provider. This is observed that changes in basic rate of electricity will change the overall total cost of electricity.
|
Months |
Total cakes |
Total Electricity Cost including supply charge |
Rent |
Other expenses |
Direct Material Cost |
Direct Labor Cost |
|
1 |
9,500.00 |
3,941.84 |
3,000.00 |
8,800.00 |
5,700.00 |
38,000.00 |
|
2 |
8,800.00 |
3,654.86 |
3,000.00 |
9,500.00 |
5,280.00 |
35,200.00 |
|
3 |
7,500.00 |
3,168.75 |
3,000.00 |
8,003.00 |
4,500.00 |
30,000.00 |
|
4 |
6,500.00 |
2,797.73 |
3,000.00 |
7,500.00 |
3,900.00 |
26,000.00 |
|
5 |
7,200.00 |
3,117.86 |
3,000.00 |
7,536.00 |
4,320.00 |
28,800.00 |
|
6 |
7,500.00 |
3,263.28 |
3,000.00 |
9,565.00 |
4,500.00 |
30,000.00 |
|
7 |
8,200.00 |
3,548.94 |
3,000.00 |
9,676.00 |
4,920.00 |
32,800.00 |
|
8 |
8,300.00 |
3,604.74 |
3,000.00 |
10,007.00 |
4,980.00 |
33,200.00 |
|
9 |
8,500.00 |
3,614.84 |
3,000.00 |
8,544.00 |
5,100.00 |
34,000.00 |
|
10 |
9,000.00 |
3,773.05 |
3,000.00 |
10,454.00 |
5,400.00 |
36,000.00 |
|
11 |
9,400.00 |
3,896.88 |
3,000.00 |
9,900.00 |
5,640.00 |
37,600.00 |
|
12 |
10,000.00 |
4,179.03 |
3,000.00 |
10,000.00 |
6,000.00 |
40,000.00 |
|
Total |
100,400.00 |
42,561.80 |
36,000.00 |
109,485.00 |
60,240.00 |
401,600.00 |
Classification of Costs as Fixed, Variable, and Mixed
This cost will not vary with the changes in productions level. Aussie Bakery will take rent, surcharge on electricity as fixed cost. In addition to this, electricity cost will also be called fixed cost as it does not vary with the level of productions.
This will vary with the changes in production level. In this case, direct labor and direct material will vary according to the changes in productions units (Hirschey, 2008).
Mixed cost is cost which will remain same for certain period and will vary accordingly after that. For instance, cost of electricity, excluding supply charges and other cost will be mized cost. This cost is charged on particular slab rate, 2550kwh are charged @ $0.50, beyond 2550kwh but less than 5500kwh it isare charged @ $0.29, and more than 5500kwh are charged @ $0.2875 (Hirschey, 2008).
This mixed cost is computed by applying high low method and least square method. The regression analysis would be used to make computation (Crosson and Needles, 2007).
This method will reflects that cost at the minimum level of production would be deducted from the cost at highest level of production. The result figure after that will be divided by the differences in units at highest level and lowest level.
|
Level |
Total cakes |
Electricity Cost ex supply charge |
|
Highest |
10000 |
4,024.03 |
|
Lowest |
6500 |
2,647.73 |
|
Difference |
3500 |
1,376.29 |
|
|
|
|
|
Variable per cake |
0.39 |
|
|
Fixed |
91.76 |
|
(Rao, 2011)
|
Level |
Total cakes |
Total Other Cost |
|
Highest |
10000 |
10,000.00 |
|
Lowest |
6500 |
7,500.00 |
|
Difference |
3500 |
2,500.00 |
|
|
|
|
|
Variable per cake |
0.71 |
|
|
Fixed |
2,857.14 |
|
Mixed cost given as below
Y = a + bx (Crosson and Needles, 2007)
Where,
Y= Independent variable (Electricity cost/other cost)
a= Intercept (Represents fixed cost
b= Slop of line (Represents variable cost)
x= Dependent variable (Cake)
(Brigham & Ehrhardt, 2016).
Relevant results of regression analysis:
|
|
Coefficients |
|
Intercept (a) |
231.51 |
|
X Variable 1 (b) |
0.3778 |
Y (electricity cost) = $231.51+0.3778*cakes
Therefore, According to regression outcome, The fixed electricity cost would be is $231.51 and variable component is $0.3778 per cake.
Relevant results of regression analysis:
|
|
Coefficients |
|
Intercept (a) |
4042.77721 |
|
X Variable 1 (b) |
0.50060398 |
Y (Other cost) = 4042.77 +0.50*cakes
While computing regression analysis, fixed cost of this units would be $4,042.77 and variable cost would be $0.50 per cake.
|
Estimate the cost of producing 6400, 8,900 and 9,900 cakes per month |
|||
|
Cakes |
|||
|
|
6400 |
8900 |
9900 |
|
Estimation of Costs |
|
|
|
|
Variable |
|
|
|
|
Direct material@ $0.50 |
3,200.00 |
4,450.00 |
4,950.00 |
|
Direct labor@ $3 |
1,920.00 |
2,670.00 |
2,970.00 |
|
Electricity@ $0.29 |
2,432.00 |
3,382.00 |
3,762.00 |
|
Other cost @ $0.50 |
3,200.00 |
4,450.00 |
4,950.00 |
|
Total (a) |
10,752.00 |
14,952.00 |
16,632.00 |
|
|
|
|
|
|
Fixed |
|
|
|
|
Rent |
2,500.00 |
2,500.00 |
2,500.00 |
|
Supply charge |
150.00 |
150.00 |
150.00 |
|
Electricity |
231.51 |
231.51 |
231.51 |
|
Other cost |
4,042.78 |
4,042.78 |
4,042.78 |
|
Total (b) |
6,924.29 |
6,924.29 |
6,924.29 |
|
Grand Total (a+b) |
17,676.29 |
21,876.29 |
23,556.29 |
Note: Variable component of mixed cost has been taken based on regression method.
Requirement 1:
|
Requirement 1: Breakeven Point |
||||
|
|
Cake-1 |
Cake-2 |
Cake-3 |
Total |
|
A. Selling Price |
5.80 |
6.30 |
6.50 |
|
|
Less: Variable Cost |
1.68 |
1.51 |
1.85 |
|
|
B. Contribution per cake |
4.12 |
4.79 |
4.65 |
|
|
C. Sales Mix (Based on Volume) |
60% |
20% |
20% |
|
|
D. Composite contribution per cake |
|
|
|
4.36 |
|
E. PV ratio (C/A) |
71% |
76% |
72% |
|
|
F. Composite PV ratio |
|
|
|
72.13% |
|
G. Fixed Cost annual |
|
|
|
83,091.46 |
|
H. Total BEP (Cakes) [G/D] |
- |
- |
- |
19,057.67 |
|
I. BEP (Cakes) [H*C] |
11,435 |
3,812 |
3,812 |
|
|
J. BEP ($) [G/F] |
|
|
|
115,189.57 |
|
K. BEP ($) [J*C] |
69,113.74 |
23,037.91 |
23,037.91 |
|
It is considered that while computing breakeven point, there will be no impact of tax on it. The tax impact could be undertaken only after reaching breakeven point.
|
Requirement 3: Margin of safety |
|||
|
|
Cake-1 |
Cake-2 |
Cake-3 |
|
A. Selling Price |
5.80 |
6.30 |
6.50 |
|
B. Current sale units |
59,280.00 |
19,760.00 |
19,760.00 |
|
C. Total Current Sales |
343,824.00 |
124,488.00 |
128,440.00 |
|
D. BEP sales |
69,113.74 |
23,037.91 |
23,037.91 |
|
E. Margin of Safety (C-D) |
274,710.26 |
101,450.09 |
105,402.09 |
|
E. Margin of Safety % (E/C) |
79.90% |
81.49% |
82.06% |
|
Explanation: The highest margin of safety will be 82.86% which is identified for the cake -3 Margin of safety will differ in three of these cakes. |
|
Requirement 4: Degree of Operating Leverage and Impact Analysis |
|||
|
|
Cake-1 |
Cake-2 |
Cake-3 |
|
A. Current Contribution |
244,233.60 |
94,610.88 |
91,923.52 |
|
B. Fixed cost allocated in sales mix |
49,854.88 |
16,618.29 |
16,618.29 |
|
C. Operating Income (A-B) |
194,378.72 |
77,992.59 |
75,305.23 |
|
D. Operating Leverage (A/C) |
1.26 |
1.21 |
1.22 |
|
Impact on Profit of Increase/decrease in Sales by 20% |
|||
|
D. % Increase/ decrease in profit (D*20%) |
25.13% |
24.26% |
24.41% |
|
Explanation: It is given that Degree of operating leverage for cake is 1,2,3 is 1.26, 1.21 and 1.22. It will give multiple effects to the operating income on decrease or increase in sales. If sale of cake increase by 20% then operating profit will also increased by 25.13% (1.26*20%). |
It is observed that If the expected sales is vary with the market factors then firm having high contribution margin will perform better. In addition to this, if the variable cost of business is kept low then in that case contribution margin would also be increased. In that case, business could take full advantage by increasing its overall sales if company is having low variable cost. Therefore, it could be inferred that company would be in beneficial position only when the rise in sales occurs due to rise in price not in volume. If sales increased by volume then it would also increase the overall variable cost.
|
Requirement 6: No of Cakes to Earn Targeted Income |
||||
|
|
Cake-1 |
Cake-2 |
Cake-3 |
Total |
|
A. Fixed Cost Annual |
|
|
|
83,091.46 |
|
B. Target Income after tax |
|
|
|
100,000.00 |
|
C. Tax @ 10% (B/90%*10%) |
|
|
|
11,111.11 |
|
D. Target Income before tax (D+C) |
|
|
|
111,111.11 |
|
E. Total contribution needed (A+D) |
|
|
|
194,202.57 |
|
F. Composite contribution per cake |
|
|
|
4.36 |
|
G. Total cakes needed (F/G) |
|
|
|
44,541.87 |
|
H. Cakes needed category wise |
26,725.12 |
8,908.37 |
8,908.37 |
|
|
I. Composite PV ratio |
|
|
|
0.72 |
|
J. Total Sales needed ($) [E/J] |
|
|
|
269,222.73 |
|
K. Sales needed category wise |
161,533.64 |
53,844.55 |
53,844.55 |
|
|
Requirement 7: Breakeven Point: Fixed cost up by $30,000 and Variable cost down by 10% |
||||
|
|
Cake-1 |
Cake-2 |
Cake-3 |
Total |
|
A. New Fixed Cost |
|
|
|
113,091.46 |
|
B. New Composite contribution per cake |
|
|
|
4.80 |
|
($4.45*110%) |
|
|
|
|
|
C. Total BEP (Cakes) |
|
|
|
23,580.37 |
|
D. BEP category wise |
14,148.22 |
4,716.07 |
4,716.07 |
|
|
Note: The decrease in variable cost of 10% will increase the PV ratio by 10%. |
||||
(Routledge, Sargeant, & Jay 2014).
|
Requirement 8: Profit: Variable cost per cake increases by 15% and selling price by 20% |
||||
|
|
Cake-1 |
Cake-2 |
Cake-3 |
Total |
|
A. New selling price |
6.96 |
7.56 |
7.80 |
|
|
B. New Variable cost |
1.93 |
1.74 |
2.13 |
|
|
C. New Contribution per unit (A-B) |
5.03 |
5.82 |
5.67 |
|
|
D. No of cakes |
59,280.00 |
19,760.00 |
19,760.00 |
|
|
E. Total contribution (C*D) |
298,059.84 |
115,026.91 |
112,134.05 |
525,220.80 |
|
F. Total Fixed Cost |
|
|
|
83,091.46 |
|
G. Operating Profit (E-F) |
|
|
|
442,129.34 |
|
Requirement 9: New break-even in sales dollars: Fixed costs and contribution margin ratio both increase by 20% |
|||||
|
|
Cake-1 |
Cake-2 |
Cake-3 |
Total |
|
|
A. New fixed cost |
|
|
|
99,709.75 |
|
|
B. New PV ratio |
|
|
|
86.56% |
|
|
C. Total BEP ($) |
|
|
|
115,189.57 |
|
|
D. Category wise |
69,113.74 |
23,037.91 |
23,037.91 |
|
|
|
Explanation: Marginal cost and fixed cost will increase with same percentage. Therefore, Net impact on BEP will be nil. |
|||||
|
Requirement 10: New break-even: Units sold increases by 15% |
|||||
|
|
Cake-1 |
Cake-2 |
Cake-3 |
Total |
|
|
A. Fixed cost |
|
|
|
83,091.46 |
|
|
C. New PV ratio |
|
|
|
72.13% |
|
|
D. BEP (cakes) |
|
|
|
115,189.57 |
|
|
E. Category wise |
69,113.74 |
23,037.91 |
23,037.91 |
|
|
|
Explanation: 15% increase in units sold will increase the sales volume by 15%. Variable cost will also be changed accordingly. Breakeven point will be same. |
|||||
Requirement 1:
|
Requirement 1: Computation of cost per cake |
|||
|
Cost Driver: Labor hours |
|||
|
|
Cake-1 |
Cake-2 |
Cake-3 |
|
A. Direct material |
29,640.00 |
9,880.00 |
9,880.00 |
|
B. Direct labor |
177,840.00 |
59,280.00 |
59,280.00 |
|
C. Manufacturing overhead per hour |
11.28 |
11.28 |
11.28 |
|
D. Total labor hours |
8,892.00 |
2,964.00 |
2,964.00 |
|
E. Total Manufacturing overhead (C*D) |
100,271.35 |
33,423.78 |
33,423.78 |
|
D. Cost per cake (A+B+E) |
307,751.35 |
102,583.78 |
102,583.78 |
|
Cost Driver: Labor cost |
|||
|
A. Direct material |
29,640.00 |
9,880.00 |
9,880.00 |
|
B. Direct labor |
177,840.00 |
59,280.00 |
59,280.00 |
|
C. Manufacturing overhead % to labor cost |
56% |
56% |
56% |
|
D. Total Manufacturing overhead (C*B) |
100,271.35 |
33,423.78 |
33,423.78 |
|
E. Cost per cake (A+B+D) |
307,751.35 |
102,583.78 |
102,583.78 |
|
Cost Driver: Oven hours |
|||
|
A. Direct material |
29,640.00 |
9,880.00 |
9,880.00 |
|
B. Direct labor |
177,840.00 |
59,280.00 |
59,280.00 |
|
C. Manufacturing overhead per oven hour |
31.32 |
31.32 |
31.32 |
|
D. oven hours used |
2,964.00 |
988.00 |
988.00 |
|
E. Total Manufacturing overhead (C*D) |
92,843.84 |
30,947.95 |
30,947.95 |
|
D. Cost per cake (A+B+E) |
300,323.84 |
100,107.95 |
100,107.95 |
In this process total cost shown will differ depending upon the sort of cost driver use for allocation of manufacturing overhead. It is analyzed that material and labor cost both will remain same in each case and cost driver will vary accordingly. The applied overhead depending upon labor would be $167,118.91. In addition to this, consumption of labor hours would be same. , Applied overhead will also be changed to $154,739.73 (Hansen, Mowen, and Guan, 2007).
|
Requirement 3: Over applied or under applied overhead for the year |
|||
|
|
Labor hours |
Labor cost |
Oven hours |
|
Total applied overheads (A) |
167,118.91 |
167,118.91 |
154,739.73 |
|
Actual Overheads |
|
|
|
|
Rent |
30,000.00 |
30,000.00 |
30,000.00 |
|
Electricity cost |
41,938.78 |
41,938.78 |
41,938.78 |
|
Other costs |
97,973.00 |
97,973.00 |
97,973.00 |
|
Total (B) |
169,911.78 |
169,911.78 |
169,911.78 |
|
Over/ (Under) Applied (A-B) |
(2,792.87) |
(2,792.87) |
(15,172.05) |
Hansen, D., Mowen, M., and Guan, L. (2007). Cost Management: Accounting and Control. Cengage Learning.
Brigham, E.F. & Ehrhardt, M.C. (2016). Financial Management: Theory & Practice. 15th ed. Boston: Cengage Learning.
Hirschey, M. 2008. Fundamentals of Managerial Economics. 9th ed. Mason: Cengage Learning
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