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Prove that the overhead rate is 105% of material cost
From the case study, number of reels and material costs per real are as follows
Grade
A
B
C
D
Number of Reels
50
2
35
175
Material cost per reel
$
4,800
$
5,200
$
5,600
$
7,400
Multiplying number of ree by material cost per real we get the total valuation amounting to $1,741,400 as shown be
Grade
A
B
C
D
Number of Reels
50
2
35
175
262
Material cost per reel
$
4,800 $
$
5,200 $
$
5,600 $
$
7,400 $
$
23,000.00 $
240,000
10,400
196,000
1,295,000
1,741,400.00
Now, the total value of overhead from the case study is $1,828,470
Therefore, taking total valuation as per overheads against material cost valuation we arrive at 105% therefore provi
Total overhead
Material cost
Percentage
$
$
1,828,470
1,741,400
105% Prooved!
we arrive at 105% therefore proving our answer.
(Traditional) Volume Based Cost Per Reel
From the case, Forest Hill Paper Company Accountants use 105% budget for overhead costs
From the exhibit 1, material cost per grade is given as follows:
Grade
A
B
C
D
Number of reel
50
2
35
175
262
Material cost per reel
$
4,800
$
5,200
$
5,600
$
7,400
$
23,000
Therefore, variable cost will be 105% of the given material cost per reel
Grade
A
B
C
D
Number of reel
50
2
35
175
262
Material cost per reel
Variable Overhead
$
4,800 $
5,040
$
5,200 $
5,460
$
5,600 $
5,880
$
7,400 $
7,770
$
23,000 $
24,150
r overhead costs
Total Cost per Volume Basec Method
$
9,840
$
10,660
$
11,480
$
15,170
$
47,150
Cost to conduct grade change
Depreciation
Labor
Energy
Other
Un-recoverables
$
$
$
$
$
$
8,000
3,000
5,000
1,000
30,000
47,000
In each category, grade change takes equal amount of the total, that is, 1/4 (a quarter)
Grade
A
B
C
D
$
$
$
$
11,750
11,750
11,750
11,750
al, that is, 1/4 (a quarter)
Cost for forest Hill to slit a reel paperboard
From exhibit 2, the total cost is $195,000
Number of reels slitted
A
B
50 units
35 units
Total
85 units
Cost per paperboard is $195,000/85=$2,294.12 per reel
The new Volume-Based Overhead after removing grade change and slitting costs
From exhibit 2
Total cost is
Less:
Grade cost
Slitting cost
New total overhead
$
1,828,470
$
$
47,000
195,000
$
1,586,470
Per real, the overhead will be $1,586,470/262
Remember, 262 is the number of reels
Therefore, per real the cost will be
$ 6,055.23
In comparison with material cost, the new volume-based overhead will be given by taking $1,586,470/$
From exhibit 2,
Old cost
New cost
$
$
1,828,470
1,586,470
The theory is that, if
$1,828,470 = 105%
$1,586,470=?
Calculating
91.10%
This is the new volume-based overhead
l be given by taking $1,586,470/$1,828,470*100%
Activity Based Costing
The method adopts specific cost allocation criteria
From the case study, the specific activities are grade change and slitting while caliper and reels are the cost driver
In summary:
Column1
Activities
Column2
Cost Drivers
Grade change
Slitting
Caliper
Number of reels
Step 1
Material cost per unit remains
Therefore, the table will be:
Grade
A
B
C
D
Number of reel
50
2
35
175
262
Material cost per reel
$
4,800
$
5,200
$
5,600
$
7,400
$
23,000
Step 2
Overhead cost has changed from 105% to 91.1%
Therefore,
Grade
A
B
C
D
Number of reel
50
2
35
175
262
Material cost per reel
$
4,800
$
5,200
$
5,600
$
7,400
$
23,000
New Overhead
$
$
$
$
$
4,372.80
4,737.20
5,101.60
6,741.40
20,953
Step 3: Grade change
Grade change is given by the cost to conduct grade change divided by the number of reels
From our calculation in question 7, grade value for A-D is 11,750 under each category
Thus,
Grade
A
B
Number of reel
Grade change
50 $
2 $
New Grade value
11,750 $
235
11,750 $
5,875
35 $
175 $
262 $
C
D
11,750 $
11,750 $
47,000 $
336
67
6,513
Replacing grade value in our tableau,
Grade
A
B
C
D
Number of reel
50
2
35
175
262
Material cost per reel
$
4,800
$
5,200
$
5,600
$
7,400
$
23,000
New Overhead
$
$
$
$
$
4,372.80
4,737.20
5,101.60
6,741.40
20,953
Step 4: Slitting
We already know that this stage involves two grades, A and C. The components are as computed in question 8.
Categorically, the values are $2,294.12/reel
The parts grade values B and D equal to $0
Replacing in our tableau:
Grade
A
B
C
D
Number of reel
50
2
35
175
262
Material cost per reel
$
4,800.00
$
5,200.00
$
5,600.00
$
7,400.00
$
23,000
New Overhead
$
$
$
$
$
4,372.80
4,737.20
5,101.60
6,741.40
20,953
New Grade value
$
235
$
5,875
$
336
$
67
$
6,513
ts are as computed in question 8.
New Grade value
Slitting Cost
$ 235.00 $ 2,294.12
$ 5,875.00 $
$ 335.71 $ 2,294.12
$
67.14 $
$
6,513 $
6,513
Total Cost
$
11,702
$
15,812
$
13,331
$
14,209
$
55,054
Table illustrations
Traditional Method (Workings on Question 6)
Grade
A
B
C
D
Cost component per reel
$
9,840
$
10,660
$
11,480
$
15,170
Grade
A
B
C
D
Table illustrations
ABC Method (Workings on Question 10)
Variation
Percentage comparison
Cost component per reel
$
11,702
$
15,812
$
13,331
$
14,209
Variance
$ (1,862)
$ (5,152)
$ (1,851)
$
961
% Change
-18.92%
-48.33%
-16.13%
6.34%
FHPC
Name
Course
Tutor
Date
Executive Summary
? Forest Hill Paper Company is paperboard corporation
? The notable areas that require customization;
? grade change
? slitting process
Introduction
? The case study involves classification and analysis
? FHPC is a small organization that manufactures wood products
? Its case is analyzed as stated below
Analysis
? ownership can be sole proprietorship or partnership
? Some of the complexities faced by FHPC include;
? Debarking
? Dissenting
? washing the pulp
Recommendation
? reduce the amount spent on labor
? slitting and grade change costs
? stop producing products that attract huge costs
Conclusion
? Strategic costing method exposes hidden costs
? discontinuation of grade B products
? the variance is 48%
? other items produced have been subsidizing the production of B
Running Head: FHPC
1
FHPC
Name
Course
Tutor
Date
FHPC
2
Executive Summary
Forest Hill Paper Company is a small paperboard corporation that plays part in a $49 billion
revenue realized by paper manufacturing industry in US. This technical expository analysis sought
to un-earthen hidden costs that result from producing unwanted products in the manufacturing line.
Specifically, the major aim was to advice the management on best cause of action.
Key issues in the case study are that, firstly, the paper industry is facing a drop in
profitability. The main reason is that cost of assembling production machines is high. Additionally,
the cost of labor is high and at times customers demand to have their products customized to meet
their specific needs. The notable areas that require customization include grade change and slitting
process. Notably, these two procedures are costly and the management ought to formulate a plan
of action that will ensure realization of profits in both short run and long run.
Recommendations resulting from the case analysis are varied. Firstly, the company board
of management should reduce the amount spent on labor. Secondly, the production line should be
streamlined to reduce slitting and grade change costs. Thirdly, leaders of FHPC should stop
producing products that attract huge costs. The perfect example is grade B product. Clearly, this
product requires huge re-current expenses. Evidently, the analysis finds out that product B, referred
to as grade B has been subsidized by other products. The traditional costing method relied by the
company didn’t help since overhead costs were not classified as per cost drivers.
FHPC
3
Introduction
The case study of Forest Hill Paper Company involves classification and analysis. From
the study, FHPC is a small organization that manufactures wood products. The general setting of
accounting principles, traditional costing system refers to uncategorized method through which an
organization doesn’t classify expenses by production line. On the other hand, strategic based
costing involves classifying expenses by their class. The case is analyzed per question as stated
below:
The management board of FHPC have perfectly employed cost accounting system.
Although the case study doesn’t expound deeper on ownership of Forest Hill Paper Company,
the description indicates that it is a small paperboard corporation. The ownership can either be
sole proprietorship or partnership.
After the ownership aspect of the corporate, the study leads the reader into understanding
the nature of business. FHPC operates in an industry that is experiences unpredictable trends in
sales. Normally, buyers make purchase speculatively hoping to utilize those supplies in future.
From the case, the company deals in an industry where rise in electronic communications has
almost stagnated resulting into cyclical environment. Additionally, the start of capital required to
venture into the industry is relatively high and the government places controls on operations.
The competitive strategy identifiable from the case study is niche based on service
delivery. Niche based strategy is a marketing model used by companies to concentrate on a
specific line of production. The method works well where companies are competing for rational
customers. From the time memorial, corporates have relied on this plan to benefit from
economies of scale. Additionally, the method enables division of labor and expertise
FHPC
4
management. From the case study, Forest Hill Corporation is doing well. Even though the
organization is characterized by cyclical environment and unpredictable nature of operations,
FHPC Company has created a niche based on service delivery. Evidently, the management seeks
to utilize this option as the major strategy in visibly competitive commodity market. The
aspiration is the main goal of the small company that it’s trying to make impact on competitive
market.
Implementation of niche based competitive strategy has not saved all complications.
Forest Hill faces complexities on expertise frontier. Notably, the process of debarking, dissenting
and washing pulp is not clarified. Normally, Complexities in organizations are defined as
undesired impediments that hinder profitability. Evidently, hindrances in the corporation results
into failure to achieve full realization of both short term and long term goals. Just like any other
company, FHPC faces several complexities. In particular, these complexities result into higher
overheads. Increase in overhead cost indicates decline in efficiency levels. From the case study
of Forest Hill Paper Company complexity is as explained below: The complicated situations in
this case study is the production process. Examples of production processes as shown in the case
study are: debarking, dissenting, and washing of pulp. The other complicated situation is
choosing the production material that meets customer cost and product changes to meet varied
customer specifications.
Prove that the overhead rate is 105% of
material cost
From the case study, number of reels and material costs per real
are as follows
FHPC
5
Number of
Grade Reels
Material cost per reel
$
A
50 4,800
$
B
2 5,200
$
C
35 5,600
$
D
175 7,400
Multiplying number of reel by material cost per reel we get the total valuation amounting to
$1,741,400 as shown below
Number of
Grade Reels
Material cost per reel
$
A
50 4,800
$
B
2 5,200
$
C
35 5,600
$
240,000
$
10,400
$
196,000
FHPC
6
$
D
$
175 7,400
1,295,000
$
262
$ 23,000.00
1,741,400.00
Now, the total value of overhead from the case study is
$1,828,470
Therefore, taking total valuation as per overheads against material cost valuation we arrive at 105%
therefore proving our answer.
$
Total overhead
1,828,470
$
Material cost
1,741,400
Percentage
105% Prooved!
(Traditional) Volume Based Cost
Per Reel
From the case, Forest Hill Paper Company Accountants use 105% budget for overhead
costs
From the exhibit 1, material cost per grade is given as follows:
FHPC
7
Material cost
Grade
Number of reel
per reel
$
A
50 4,800
$
B
2 5,200
$
C
35 5,600
$
D
175 7,400
$
262 23,000
Therefore, variable cost will be 105% of the given material cost per reel
Grade
Number of reel
Material cost
Variable
Total Cost per Volume Based
per reel
Overhead
Method
FHPC
8
$
A
50 4,800
$
B
2 5,200
$
C
35 5,600
$
D
175 7,400
$
262 23,000
$
$
5,040
9,840
$
$
5,460
10,660
$
$
5,880
11,480
$
$
7,770
15,170
$
$
24,150
47,150
Cost to conduct grade change
Depreciation
$
8,000
Labor
$
3,000
Energy
$
5,000
Other
$
1,000
Un-recoverable
$
30,000
$
47,000
In each category, grade change takes equal amount of the total, that is, 1/4 (a
quarter)
FHPC
9
Grade
$
A
11,750
$
B
11,750
$
C
11,750
$
D
11,750
Cost for forest Hill to slit a reel paperboard
From exhibit 2, the total cost is $195,000
Number of reels slitted
A
50 units
B
35 units
Total
85 units
Cost per paperboard is $195,000/85=$2,294.12 per reel
FHPC
10
The new Volume-Based Overhead after removing grade change and
slitting costs
From exhibit 2
Total cost is
$
1,828,470
Grade cost
$
47,000
Slitting cost
$
195,000
New total overhead
$
1,586,470
Less:
Per real, the overhead will be $1,586,470/262
Remember, 262 is the number of reels
Therefore, per real the cost will be
$ 6,055.23
In comparison with material cost, the new volume-based overhead will be given by taking
$1,586,470/$1,828,470*100%
From exhibit 2,
Old cost
$
1,828,470
New cost
$
1,586,470
The theory is that, if
$1,828,470 = 105%
FHPC
11
$1,586,470=?
Calculating
91.10%
Thus, 91.10% is the new volume-based
overhead
Activity Based Costing/Strategic
The method adopts specific cost allocation
criteria
From the case study, the specific activities are grade change and slitting while caliper and reels are the cost
drivers
Step 1: Initial Material Cost
Material cost per unit
remains
Therefore, the table will be:
Grade
Number of
Material cost per
reel
reel
$
A
50
4,800
FHPC
12
$
B
2
5,200
$
C
35
5,600
$
D
175
7,400
$
262
23,000
Step 2: New overhead cost
Overhead cost has changed from 105% to 91.1%
Therefore,
Grade
A
Number of
Material cost per
reel
reel
New Overhead
$
$
50 4,800
$
B
2 5,200
$
C
35 5,600
$
D
175 7,400
4,372.80
$
4,737.20
$
5,101.60
$
6,741.40
FHPC
13
$
262 23,000
$
20,953
Step 3: Grade change
Grade change is given by the cost to conduct grade change divided by the number of
reels
From our calculation in question 7, grade value for A-D is 11,750 under each
category
Thus,
Number of
Grade
A
B
C
D
reel
Grade change
New Grade value
$
$
50 11,750
235
$
$
2 11,750
5,875
$
$
35 11,750
336
$
$
175 11,750
$
262 47,000
67
$
6,513
FHPC
14
Replacing grade value in our
tableau,
Grade
A
Number of
Material cost per
reel
reel
New Overhead
$
$
50 4,800
$
B
2 5,200
$
C
35 5,600
$
D
175 7,400
$
262 23,000
4,372.80
New Grade value
$
235
$
5,875
$
336
$
67
$
6,513
$
4,737.20
$
5,101.60
$
6,741.40
$
20,953
Step 4:
Slitting
We already know that this stage involves two grades, A and C. The components are as computed
in question 8.
Categorically, the values are $2,294.12/reel
FHPC
15
The parts grade values B and D equal to $0
Replacing in our tableau:
Grade
A
Number of
Material cost per
reel
reel
New Overhead
$
$
50 4,800.00
$
B
2 5,200.00
35 5,600.00
262 23,000
value
Cost
Cost
$
$
2,294.12
11,702
$
$

15,812
$
$
2,294.12
13,331
$
$

14,209
$
$
6,513
55,054
$
235.00
4,737.20
$ 5,875.00
5,101.60
$
335.71
$
175 7,400.00
$
Total
$
$
D
Slitting
$
$
C
4,372.80
New Grade
6,741.40
$
67.14
$
20,953
$
6,513
Table illustrations
Traditional Method (Workings on
ABC Method (Workings on
Question 6)
Question 10)
Variation Percentage comparison
FHPC
16
Cost component per
Grade
A
B
C
D
reel
Cost component per reel
$
$
9,840
11,702
$
$
10,660
15,812
$
$
11,480
13,331
$
$
15,170
14,209
Variance
% Change

$ (1,862) 18.92%
$ (5,152) 48.33%
$ (1,851) 16.13%
$
961
6.34%
Recommendation
From the case study, there are notable recommendations resulting from the case analysis
are varied. Firstly, the company board of management should reduce the amount spent on labor.
Secondly, the production line should be streamlined to reduce slitting and grade change costs.
Thirdly, leaders of FHPC should stop producing products that attract huge costs. The perfect
example is grade B product. Clearly, this product requires huge re-current expenses. Evidently, the
analysis finds out that product B, referred to as grade B has been subsidized by other products.
The traditional costing method relied by the company didn’t help since overhead costs were not
classified as per cost drivers.
FHPC
17
Conclusion
Strategic costing method exposes hidden costs that are not realized under traditional
method. As a consultant of Forest Hill, I would recommend on discontinuation of grade B
products. Clearly, the variance is 48%. The primary indication of this realization is that other
items produced have been subsidizing the production of B.
ISSN 1940-204X
Forest Hill Paper Company
Thomas L. Albright
University of Alabama
Introduction
minimal inventories. Production schedules are driven by
two factors: market demand and the theoretically optimal
production schedule. The optimal production schedule is
designed to reduce waste associated with grade changes by
producing successive batches with minor differences in
basis weight.
Forest Hill Paper Company (FHPC) is a small, closely-held
paperboard manufacturer that produces a broad line of
paperboard in large reels, termed parent rolls. These parent
rolls are sold to converters who further process them into
containers used for a diverse line of consumer products,
such as packaging for microwavable meals. The owners of
FHPC have long pursued the strategy of producing a full
range of products. As a small company competing against
large companies in a commodity market, management
believes Forest Hill must offer a full range of both products
and services. Thus, Forest Hill’s strategy is to create a niche
based on service and rapid response to customer needs.
While product diversity within a paperboard plant would not
be apparent to a casual observer, subtle differences exist.
For example, paperboard differs by basis weight (thickness
determined by caliper measurements) for a specified length
of product. Additionally, paperboard may be uncoated or
coated with an opaque, white clay-based material that masks
cosmetic flaws and smooths surface variability. Customers
are increasingly concerned with surface variability because
an extremely smooth finish is required to accommodate
complex printed designs on the completed paperboard
container or carton.
FHPC produces 20 different grades of paperboard. Some
grades are produced in large quantities requiring production
runs of several days, while others are produced in smaller
quantities requiring runs of only a few hours. Consistent
with lean manufacturing principles, the company maintains
IMA EDUCATIONA L CA S E JOURNAL
Competitive Environment
Paper and paperboard producers operate in a cyclical
economic environment, with upswings every three to four
years. In response to limited supply during an economic
boom, customers often double or triple the quantities
ordered. Then, they begin receiving their large orders as
the economy, once again, begins to slow. As a result, many
customers find their paper inventories exceed current needs
and temporarily stop placing orders. To further confound the
paperboard producers’ headaches, market share for domestic
paperboard has been declining. The most significant
contributors to the loss of market share are the trend toward
plastic and to more environmentally friendly grades of
recycled paperboard.
Throughout the …
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