Milestone One : Draft of CVP analysis

Submit a draft of the cost-volume-profit analysis (Section I of the final project), including all critical elements as listed in the Final Project Guidelines and Rubric document. Refer to the Hampshire Company Case Study document, as this provides details on how to complete this milestone. All calculations for your quantitative analysis should be completed in the Hampshire Company Spreadsheet. You will provide a rough draft of the written portion of your qualitative analysis in a Word document.
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ACC 550 Hampshire Company Case Study
Section I: Cost-Volume-Profit Analysis
The Hampshire Company manufactures umbrellas that sell for $12.50 each. In 2014, the company made
and sold 60,000 umbrellas. The company had fixed manufacturing costs of $216,000. It also had fixed
costs for administration of $79,525. The per-unit costs of each umbrella are as follows:
Direct Materials: $3.00
Direct Labor: $1.50
Variable Manufacturing Overhead: $0.40
Variable Selling Expenses: $1.10
Using the information above, perform a cost-volume-profit (CVP) analysis by completing the steps
below. All CVP calculations should be completed in the Hampshire Company Spreadsheet. Note: The
CVP analysis satisfies Part A of Section I.
1. Compute net income before tax.
2. Compute the unit contribution margin in dollars and the contribution margin ratio for one
umbrella.
3. Calculate the break-even point in units and dollars of revenue. Note: This is a required part of
the CVP analysis and satisfies Part C of Section I.
4. Calculate the margin of safety:
a. In units
b. In sales dollars
c. As a percentage
5. Calculate the degree of operating leverage.
6. Assume that sales will increase by 20% in 2015. Calculate the percentage of before-tax income
for this increase. Provide calculations to prove that your percentage increase is correct based on
the operating leverage calculated in step 5.
7. Compute the number of umbrellas that Hampshire is required to sell if it plans to earn $120,000
in income before taxes by using the target income formula. Proof your calculation.
8. A company that specializes in tours in England has offered to purchase 5,000 umbrellas at $11
each from Hampshire. The variable selling costs of these additional units will be $1.30 as
opposed to $1.10 per unit. Also, this production activity will incur another $15,000 of fixed
administrative costs. Should Hampshire agree to sell these additional 5,000 umbrellas to the
touring business? Provide calculations to support your decision.
Additionally, complete Parts B and D of Section I as outlined in the Final Project Guidelines and Rubric
document.
Section II: Inventory Management
The information below represents the beginning and ending inventory amounts along with the
production and sales for the month in umbrella units.
Beginning Inventory: 0 Umbrellas
Production: 80,000 Umbrellas
Sales: 60,000 Umbrellas
Ending Inventory: 20,000 Umbrellas
Using the information provided above and the costs and sales information provided in Section I,
complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to
all components of Section II:
•
•
Prepare a variable costing income statement.
Prepare an absorption costing income statement.
Additionally, complete Parts A through E of Section II as outlined in the Final Project Guidelines and
Rubric document.
Section III: Benchmarking
The management of the Hampshire Company would like to implement benchmarking. Standard costs
have been established and are presented below. You will want to complete a variance analysis to
include efficiency and price variances for materials (cloth and handle assemblies) and labor based on the
following data:
Units Produced = 80,000
Units Sold = 60,000
Direct Materials Purchased and Used
Actual square yards of cloth purchased and used: 128,000
Actual price incurred per yard: $1.25
Actual handles purchased and used: 80,808
Actual price per handle/rib/stretcher assembly: $0.99
Direct Manufacturing Labor Used
Actual direct labor hours used: 15,748
Actual price per hour: $7.62
Direct labor costs: $120,000
Standard Rates
Standard labor hours per unit: 0.20
Standard labor price per hour: $7.50
Square yards material per unit: 1.50
Standard price per yard: $1.15
Handle/rib/stretcher assembly per unit: 1
Standard price per handle assembly: $1.05
Companies can use variance analysis and benchmarking to measure performance within their own
company and against competitors. This can be done by setting standards/budgets and comparing a
completed variance analysis to results from prior periods or comparing them to competitors’ results.
Using the information provided above, complete the following calculations (steps 1 and 2) in the
Hampshire Company Spreadsheet. This will assist you in responding to all components of Section III.
1. Calculate price variances for material and labor and denote whether they are favorable or
unfavorable.
2. Calculate efficiency variances for material and labor and denote whether they are favorable or
unfavorable.
In order to measure performance and make use of the variance analysis completed, management
understands the need to compare results with their competitors. Following the steps outlined below,
you will research benchmarking and propose the most effective approach for your company. Respond to
Parts A through C of Section III as outlined in the Final Project Guidelines and Rubric document.
Section IV: Alternative Costing Method
Hampshire has always produced stick umbrellas. However, it is considering expanding its production to
include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company
that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The
management at Hampshire is currently working out a deal with the touring company to produce 3,000
collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that
can be directly traced to this special order:
Direct Materials: $9,300
Direct Labor Hours: 600
Hourly Rate of Direct labor: $8.00
In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This
expansion in production will add additional overhead costs. The total overhead costs (assuming
production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided
in Table 2.
An alternative costing method that might benefit Hampshire is the implementation of activity-based
costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this
special order of collapsible umbrellas. The controller has assembled the following information:
Stick
Units Sold
60,000
Selling Price
$12.50
Direct Material Cost per Unit
$3
Direct Labor Cost per Hour
$7.50
Variable Manufacturing Overhead
$0.40
Variable Selling Costs
$1.10
Labor Hours per Unit
0.2
Sales Orders
120
Purchase Orders
50
Production Runs
45
Material Moves
86
Machine Setups
130
Machine Hours
525
Inspections
200
Shipments
60
Table 1: Direct Cost Information and Activities
Activity
Order Processing
Purchasing
Material Handing
Machine Setup
Production
Assembly
Inspecting
Shipping
Collapsible
3,000
$14.00
$3.10
$8.00
$0.40
$1.10
0.2
1
3
6
10
6
32
10
3
Activity Cost
Activity Cost Driver
$35,000 Number of Sales Orders
$36,000 Number of Purchase Orders
$28,000 Material Moves
$14,000 Machine Setups
$99,000 Production Runs
$80,000 Machine Hours
$11,000 Number of Inspections
$7,500 Number of Shipments
Table 2: Activity Cost Pools and Cost Drivers
Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will
need to determine which of these three methods would be the best approach for the Hampshire
Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing.
Additionally, you may want to use the Shapiro Library to conduct further research on the three
methods. You will need to defend your position when answering the prompts for the written portion of
this section.
Using the information provided above, complete the following in the Hampshire Company Spreadsheet
in order to assist you in responding to all components of Section IV:
1. Calculate the allocation rates for each cost driver using ABC.
2. Use the traditional costing approach to calculate the total cost and the unit cost of the stick and
collapsible umbrellas.
3. Use ABC to compute the total costs and the unit cost for the stick and collapsible umbrellas.
4. Compute the difference between the product cost per stick and collapsible umbrellas using the
unit cost that you computed with the traditional approach and the one that you computed using
ABC.
Based on your calculations from steps 1–4, respond to Parts A through C in Section IV as outlined in the
Final Project Guidelines and Rubric document.
Section V: Memo to Management
The management of the Hampshire Company is very interested in measuring performance. They would
like you to recommend a strategy to increase business performance. They are not sure whether they
should focus on product differentiation or cost leadership. Research additional performance tools to
include the balanced scorecard. During your research, consider what performance measurements you
would use based on the four perspectives. Provide examples.
In your recommendation, you will want to include the outcome of your previous quantitative analysis
and research performed related to cost-volume-profit (CVP), variable and absorption costing, just-intime (JIT), standard costs, variances, and benchmarking. You will want to review key points and make
recommendations based on your current research and prior analysis completed and research
performed.
Your two- to three-page memo to management must be submitted as a Word document and must
include your responses to Parts A through C of Section V as outlined in the Final Project Guidelines and
Rubric document.
Requirement 1
Units
Sales
Variable Costs
Fixed Costs
Net Income
Price
X$
X$
Requirement 2
Contribution Margin per Unit in Dollars = Selling Price – Variable Costs
Selling Price
Variable Costs
Contribution Margin Ratio = Contribution Margin/Selling Price
Contribution Margin
Selling Price
Requirement 3
Break-Even Point = Fixed Costs / Contribution Margin
Fixed Costs
Contribution Margin
Break-Even Point in Units X Selling Price per Unit = Break-Even Point Sales
Break-Even Point in Units
Selling Price per Unit
Requirement 4A
Margin of Safety in Units = Current Unit Sales – Break-Even Point in Unit Sales
Current Unit Sales
Break-Even Point in Sales
Requirement 4B
Margin of Safety in Dollars = Current Sales in Dollars – Break-Even Point Sales in Dollars
Current Sales in Dollars
Break-Even Point in Dollars
Requirement 4C
Margin of Safety as a Percentage = Margin of Sales in Units / Current Unit Sales
Margin of Safety in Units
Current Unit Sales
Requirement 5
Degree of Operating Leverage = Contribution Margin / Operating Income
Contribution Margin
Operating Income
Requirement 6
Units
Sales
Variable Costs
Fixed Costs
Net Income
Operating Leverage
Prior Income
Increase
Total
$ Per Unit
X$
X$
Times % Increase

$
$
$
From Part 1
Prior Income X XX% Above
Requirement 7
Targeted Income = (Fixed Costs + Target Income) / Contribution Margin
Fixed Costs + Target Income
Fixed Costs
Target Income
Total
Proof
Divided by Contribution Margin
$
$
$
$
# of Units Above X $ Per Unit
Revenue
XX,XXX X $XX.XX
Variable Costs
XX,XXX X $X.XX
Contribution Margin
Fixed Costs
Net Income
Requirement 8
Sales Mix
Current
Expected Sales Units
Revenue = Sales X Price
Variable Costs X Units
Contribution Margin
Fixed Costs
Operating Income
Specialty
X
$
$
$
$
X
$
$
$
$
Prior Net Income From Requirement 1
Additional Operating Income
Decision With Explanation
(Operating Income Above Less Prior Income)
Totals
$
$
$
$
Contribution Margin per Unit
Contribution Margin Ratio
Break-Even Point in Units (Rounded)
Break-Even Point in Sales (Rounded)
Margin of Safety in Units
es in Dollars
Margin of Safety in Dollars
Margin of Safety Percentage
Operating Leverage
Totals
$
$
$
$
Increase would be XX%
# of Units (Rounded)
X
$
$
$
$
$
Total
$
$
$
$
$
$
$
Requirement 1
Hampshire Company
Variable Costing Income Statement
Units
Sales
Variable Cost of Goods Sold:
Beginning Inventory
Direct Materials
Direct Labor
Manufacturing Overhead
Total Variable Costs
$
X$
$
$
$
$
$
$
X $
X $
X $
Cost of Good Available for Sale
Deduct Ending Inventory
Variable Costs of Goods Sold
Variable Selling Costs
Contribution Margin
Fixed Costs:
Fixed Manufacturing Costs
Fixed Administrative Costs
Operating Income
$
$
X$
X $
$
$
$
$
$
$
$
Requirement 2
Hampshire Company
Absorption Costing Income Statement
Units
Sales
Variable Cost of Goods Sold:
Beginning Inventory
Direct Materials
Direct Labor
Manufacturing Overhead
Total Variable Costs
Allocated Fixed Manufacturing Costs
Cost of Good Available for Sale
Deduct Ending Inventory
Costs of Goods Sold
Gross Margin
Fixed Costs:
Variable Selling Costs
$
X$
X $
X $
X $
X $
X$
$
$
$
$
$
$
$
$
$
$
$
X $
$
Fixed Administrative Costs
Operating Income
$
$
Requirement 1
Price Variances:
(Actual Price – Standard Price) X Actual Quantity
Actual
Standard
Actual Quantity Variance Favorable or Unfavorable
X$
Cloth
$
$
Handle Assembly
$
$
X$
Labor Price Variance $
$
X$
Requirement 2
Efficiency Variances:
(Actual Quantity of Input Used – Standard Quantity of Input Allowed for Actual Output) X Budgeted Price of Input
Actual
Cloth
(1.5 Yards per Unit)
Handle Assembly
(1 per Unit)
Labor
(.20 per Unit)
X
Standard
X$
Standard Price
Variance Favorable or Unfavorable
$
X
X$
$
X
X$
$
or Unfavorable
ted Price of Input
or Unfavorable
Cost Information From Instructions
Stick
Units Sold
Selling Price
Direct Material Cost Per Unit
Direct Labor Cost Per Hour
Variable MO
Variable Selling Costs
Labor Hours Per Unit
Sales Orders
Purchase Orders
Production Runs
Material Moves
Machine Setups
Machine Hours
Inspections
Shipments
Collapsible
60.000
$12,50
$3,00
$7,50
$0,40
$1,10
0,2
120
50
45
86
130
525
200
60
Activity Information from Instructions
Activity
Order Processing
Purchasing
Material Handing
Machine Setup
Production
Assembly
Inspecting
Shipping
Activity Cost
$35.000
$36.000
$28.000
$14.000
$99.000
$80.000
$11.000
$7.500
3.000
$14,00
$3,10
$8,00
$0,40
$1,10
0,2
1
3
6
10
6
32
10
3
Activity Cost Driver
Number of Sales Orders
Number of Purchase Orders
Material Moves
Machine Setups
Production Runs
Machine Hours
Number of Inspections
Number of Shipments
Requirement 1
Activity
Order Processing
Purchasing
Material Handing
Machine Setup
Production
Assembly
Inspecting
Shipping
Total Costs
$
$
$
$
$
$
$
$
Quantity of Cost Allocation
Base
X
X
X
X
X
X
X
X
Requirement 2
Traditional Costing
Stick Umbrella
Revenues
Direct Materials
Direct Labor
$
$
$
Collapsible Umbrella
$
$
$
Variable Overhead
Variable Selling Costs
Allocated Fixed Overhead
Total Costs
Operating Income
Operating Income %
Per Unit Operating Income
$
$
$
$
$
$
$
$
$
$
%
$
%
$
Requirement 3
Activity-Based Costing
Stick Umbrella
Revenues
Direct Materials
Direct Labor
Variable Overhead
Variable Selling Costs
Order Processing Costs
Purchasing Costs
Material Handing Costs
Machine Setup Costs
Production Costs
Assembly Costs
Inspecting Costs
Shipping Costs
Total Costs
Operating Income
Operating Income %
Per Unit Operating Income
Requirement 4
Costs per Unit
Traditional
ABC
Difference
Requirement 5
Collapsible Umbrella
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
%
$
%
$
Stick Umbrella
$
$
$
Collapsible Umbrella
$
$
$
Overhead Allocation
Rate
$
$
$
$
$
$
$
$
Total
$
$
$
$
$
$
$
$
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
ACC 550 Final Project Guidelines and Rubric
Overview
The final project for this course is the creation of a quantitative analysis that includes an Excel spreadsheet, accompanied by a memo to management.
Accountants provide management with the logistics of the business that are crucial for daily operations and a company’s overall success. In any business, it is of
the utmost importance to be aware of all finances and internal processes. Cost accountants focus solely on the internal processes of a business and are tasked
with eliminating any unnecessary costs in order to maximize profits.
In this assessment, you have been tasked with conducting a quantitative analysis that looks into the internal processes of a company. Based on your analysis, you
will formulate recommendations to management that aim to improve internal processes and increase profits for the company.
The project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final
submissions. These milestones will be submitted in Modules Three, Five, and Seven. Your final submission will occur in Module Nine.
In this assignment, you will demonstrate your mastery of the following course outcomes:
?
?
?
?
ACC-550-01: Apply cost-volume-profit (CVP) analysis based on cost classification for planning and control of internal accounting processes within an
organization
ACC-550-02: Assess cost and revenue allocation methods for providing relevant information to decision makers
ACC-550-03: Select the optimal inventory management method for meeting the needs of an organization
ACC-550-04: Evaluate cost accounting performance and planning tools for their impact on business operations
Prompt
Conduct a quantitative analysis of a company’s internal processes using the Hampshire Company Case Study document. Your analysis will consist of completing
the Hampshire Company Spreadsheet and will be accompanied by a memo to management.
Specifically, the following critical elements must be addressed:
I.
Cost-Volume-Profit Analysis
Cost-volume-profit (CVP) analysis is a useful tool for informing short-term economic planning within an organization. In this section, a CVP analysis
will be conducted and used to inform business decisions and recommendations.
A. Perform a CVP analysis based on cost classifications.
B. Explain how a CVP analysis can assist management with short-term economic planning. Support your response with examples from your
CVP analysis.
C. Accurately compute the break-even quantity and break-even revenue.
D. Determine whether the company is breaking even. What are the CVP analysis implications on planning?
II.
Inventory Management
Inventory management serves to minimize the cost to maintain inventory and maximize returns. In this section, the company’s financial data will be
reviewed in order to determine the optimal inventory management system.
A. Determine an optimal cost allocation method based on the relevant costs.
B. Describe how this method should be used by decision makers to fulfill their responsibilities. Support your response with examples.
C. What are the pros and cons of implementing the just-in-time (JIT) inventory system? Do the pros outweigh the cons for this company?
D. Explain how the just-in-time (JIT) inventory system can benefit this organization. Defend your response.
E. Identify the inventory management method you recommend, and explain why this method will benefit the company.
III.
Benchmarking
In this section, benchmarking will be reviewed. Benchmarking can be implemented in various ways depending on a company’s circumstances. Your
company has decided to implement benchmarking and would like you to research and recommend the most effective approach.
A. What is the advantage to benchmarking in terms of improving companies’ performance? Support your response.
B. Identify possible approaches to benchmarking. Describe each.
C. Which benchmarking method should management adopt and why?
IV.
Alternative Costing Method
There are various costing methods available for companies to implement. As a company grows, it may become beneficial to consider an alternate
costing method.
A. Identify an alternative costing method that could benefit this company, and describe the main characteristics of that method.
B. What should a company look for when trying to determine whether they should adopt such a system?
C. Should the company adopt this alternative costing method? Defend your response.
V.
Memo to Management
Your memo to management should serve as a summary of your quantita …
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