For the second part, answer the following questions. Submit this portion of the midterm as a Word document. 1. You want to use break-even and target profit analysis with respect to the introduction of a new product in the marketplace. Your manager says you are wasting your time because the best determination of profitability is the income statement after this product has been introduced. Explain why your manager is wrong.
In order to fully understand the process of profitability within a business, we must understand what break-even and target profit analysis represent and the function that each provides. The cost of doing business includes the use of fixed costs and variable cost. The break-even analysis provides the unit volume that balances total costs with the amount of total gains for net cash flow. Break-even analysis is simply determined by the fixed cost of an item, variable cost per unit and revenue per each unit.
Businesses need to determine how many units of a product must sell to cover all costs, understanding both kinds of break-even points time and business volume is important to any business. The target profit analysis is the determination of business activities performed in order to find out the sales volumes required to generate a profit target. Profitability is a main aspect in a company’s financial reporting, therefore all aspects of the business must be looked at carefully while performing an analysis of their products and whether or not they are going to be profitable.
While all financial statements include certain elements related to profitability, such as retained earnings in the balance sheet and operating cash flows from the statement of cash flows, the income statement directly shows profitability of a company by providing information on net income for a specified accounting period. An income statement can use different formats and have various reporting elements, depending on a company’s business activities.
The income statement is simply an accrual accounting which helps determine direct income and expenses, what is not so important is payment per-say but rather much more interested in the time it takes to produce the product. In the business world this would mean that recognizing expenses is secondary to the recording of income before there is cash in hand. The income statement can essentially mask a struggling company or in some cases inadequate accounting procedures. The manager is wrong because too many other factors have not been taken into consideration as mentioned previously.
The manager has not conducted further analysis into what it takes to produce the product based on the fixed and variable cost, therefore he does not know whether the product even produced a profit or is failing to meet expectations. His assumption does not warrant the simple answer as to looking at the income statement after the product has been introduced. The analysis would have already told him if there is a profit margin for the given product prior to the income statement.
The fact that your organization under applies or over applies overhead is an indication of a problem with the people in charge of applying such overhead. Defend or attack this statement. I am going to defend this statement even though a portion of it has some merit and could indicate lesser of a problem than it might appear. Operating a business is a complex business that requires everyone aboard to do their part, hence putting blame on the people in charge might not be so hard to accept.
I would have to agree that some responsibility within the organization does apply to those in charge of ensuring under or over applying overhead, however we must understand what overhead constitutes. Simply stating that there is an indication of overhead within and organization does not automatically mean that there is indication or concerns for problems by those in charge. Overhead cost is an ongoing expense that is used to operate a business but should not be associated with the products and services being offered because they are not directly associated with profits.
Manufacturing overhead also include cost that is more appropriately to be treated as cost of all outputs like overtime premium, cost of idle time, utilities cost. Because applying overhead is an estimated guess that some businesses apply at the beginning of the year to compensate, therefore some balance of overhead is bound to be over- or under-applied at the end of the year. Proper and accurate accounting for these difference between actual and applied overhead is fundamentally important in keeping your company’s inventory cost reporting accurate when it is time to prepare financial income statements.
This process appears to be a balancing act based on estimations, but close inspections of overhead cost can determine what direction a company is heading in and what it must do to reduce the possibility of under or over applying overhead. Businesses should gauge whether over or under applied overhead has occurred anytime within the accounting period by simply inspecting the balances in the overhead accounts within the financial statements.
The debit side on the financial statement represents actual overhead costs, and the entries should be consistent with the nvoices received, pay records and transfers of materials used in the production process. The credit side of the account represents overhead applied to products, and predetermined overhead rate should be considered in this area as well. The issue with overhead and responsibility can be considered a twofold process because of the factors that could subsequently be viewed as a responsibility of ownership in regards to those who are in charge.
Factors for the possibility of over or under applied overhead consist of the potential of wrong estimation of work done, the amount of work done may greatly exceed or may be less than the estimated work. Potential for errors in using method of absorption, seasonal fluctuation in overhead, and wrong estimation of output. Ultimately, the person or persons in charge are responsible for the overhead controllable variance, and are responsible for ensuring that overhead costs are within budget guidelines.