Week 4 5110 PDF

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it is a paper that includes all three assignments of the fourth week of the managerial accounting course....

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Introduction Incremental analysis is a decision-making approach used in business to assess the genuine cost difference between options, according to Heisinger & Hoyle, (n.d.). Incremental analysis, also known as the relevant cost method, marginal analysis, or differential analysis, disregards any sunk or prior cost. Incremental analysis is important in company planning, such as deciding whether to self-produce or outsource a function. Financial data that would be included and excluded in a differential analysis Include: Included 

Sales revenue



Production costs 1. Variable Costs: Variable costs are always significant since they change with production level. 2. Avoidable Fixed Costs: If certain fixed costs exist that, although not varying with the amount of production, could be averted entirely if a specific product line or client is terminated, or could be prevented by not accepting a special order, this is significant for our decision making. (Tuovila, 2021) 3. Semi-Fixed Costs: These are especially important since orders from new clients may raise output over a specific threshold, resulting in higher costs.

 Opportunity costs: It refers to the expense of selecting between options. It is highly important for our decision making and is included in the differential analysis since it reflects the profit/money that might have been produced with the existing resources if they had been invested in another choice. That indicates that by selecting this particular choice, we are forfeiting that profit, and so it is meaningful to us (Kenton, 2020). Excluded 

Sunk cost or Past cost: It denotes a cost which has already been incurred and cannot be undone. It is not important for decision making and hence should not be included in the differential analysis because it is a previous expense and acceptance of a new order or introduction of a new product line will have no influence on it (Kenton, 2020).



Other product lines

Revenues and Costs to keep in evaluating whether to drop or keep a: 

Customer: The firm should assess its present sales income, cost of goods sold (COGS), fixed and differential expenses.

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Product Line: In order to establish if a given model of electric car is lucrative, we must compare the data to other models. This will be a comprehensive review that includes not just fixed expenditures but also sunk costs such as R&D, warehousing, and wages. Opportunity costs should be considered as well.

Reference Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for managers: How are relevant revenues and costs used to make decisions? https://2012books.lardbucket.org/books/accounting-for-managers/index.html Kenton, W. (2020, July 01). Opportunity Cost. Investopedia. https://www.investopedia.com/terms/o/opportunitycost.asp Tuovila, A. (2021, Feb 25). Sunk Cost. Investopedia. https://www.investopedia.com/terms/s/sunkcost.asp

Vacuum Manufacturer Study Case

University of the people

Bus 5110: Managerial Accounting

Dr. Jacent Gayle.

Nov 30, 2021

Introduction When contemplating making production modifications in a manufacturing scenario, differential analysis is a strong tool to utilize. The differential analysis provides a breakdown of the numerous variable and fixed costs involved in the manufacturing of a unit and how they compare to other possible solutions by analyzing expenses in the production of a unit (Heisinger & Hoyle, n.d.). Manufacturers utilize this tool to make informed decisions on issues such as product line discontinuation and outsourcing labor and/or parts. Calculations and Explanations To conduct a differential analysis, the production costs for both choices, continuing to manufacture the engine and outsourcing the labor, must be determined. Even if the selling price of the vacuum was provided, it is not required for the computations because the manufacturing costs are sufficient to do a valid differential analysis. All of the additional expenditures listed are important to the calculations required for the study. The yearly revenue can be utilized for additional analysis, such as contribution margins, but it is not required to provide a proper review of the calculations because the sales price does not vary for either option. The offered case study includes particular expenses as well as percentages for additional costs. Furthermore, the figures are offered in several units; some are in cost per unit, while others are in cost per month. Given a 50,000unit yearly production rate, the variable and fixed costs will be converted to annual costs for convenience of computation and analysis. Alternative #1: Keep Making the Engine Direct material cost is given to be $75,000 per month, which equals $900,000 per year ($75,000 * 12) and is also equal to $18 per unit ($900,000 / 50,000). Direct labor cost is given to be $100,000 per month, which equals $1,200,000 per year ($100,000 * 12) and is also equal to $24 per unit ($1,200,000 / 50,000). Variable factory overhead cost is given to be $7.50 per unit, which equals $375,000 per year ($7.50 * 50,000). Fixed factory

overhead cost is given to be 150% of direct labor cost, which equals $36 per unit ($24 * (150% / 100%)) and is also equal to $1,800,000 per year ($36 * 50,000). The total production cost for alternative 1 is $4,275,000 per year.

Alternative #2: Outsource the Engine The second alternative is presented as outsourcing the manufacturing of the engine to a third party. The third party offers to manufacture the engine at $60 per unit, which equals a yearly cost of $3,000,000 ($60 * 50,000). By outsourcing the engine to a third party, the vacuum manufacturer would be cutting direct material cost, direct labor cost, and variable factory overhead cost, and as such these will not be used in the calculation for total production costs. The business will still sustain fixed factory costs but at a lower rate, calculated to be equal to 75% of the fixed factory overhead cost of alternative 1. The calculated value is equal to $1,350,000 (($1,800,000 * (75% / 100%)). Alternative 2 still sustains fixed factory costs, although at a lower rate, because the factory still has expenses for the completion of the vacuum assembly. Many other costs still need to be covered by these fixed factory costs, like management salaries, rent to the facility, taxes, depreciation on machinery. The easiest way to explain the reduced rate of fixed factory costs is that the engine manufacturing fixed overhead costs account for 25% of the fixed factory overhead costs. If we outsource the engine production, the business saves that 25% of fixed factory overhead. The total production cost for alternative 2 is $4,350,000 per year. Differential Analysis To get a conclusion, the various costs and total production costs must be compared as part of the differential analysis. The differential amount, which is the difference between the computed values for alternative 1 and alternative 2, is used to determine whether the final total production cost increases or lowers. Alternative 2 includes a $3,000,000 annual cost increase for purchasing the engine outside, a $900,000 annual direct material cost savings, a $1,200,000 annual direct labor cost savings, a $375,000 annual variable factory overhead cost savings, and a $450,000 annual fixed factory overhead cost savings. The total of the differential sums is a $75,000 cost increase each year for outsourcing the engine. Recommendations

The supplied differential analysis shows that outsourcing the engine would be more expensive for the vacuum manufacturer than continuing to produce its own engines. Given that the prices for Alternative 2 are made up of only two components, the vacuum maker might make a counteroffer to the third-party supplier in order to lower the cost per unit or possibly further reduce fixed factory overhead costs. Alternative 2 would be preferable if fixed factory expenses were reduced by 70%, or $1,260,000 (($1,800,000 * (70 percent / 100 percent)). Other aspects to consider include sunk costs, opportunity costs, and qualitative issues. Sunk costs are past expenditures on machinery that will no longer be used in the factory. Perhaps the manufacturer might recoup some of its costs by selling these used. A potential opportunity cost would be the advantage of running the factory floor more effectively due to the extra space offered by eliminating engine manufacture (White, 2018), resulting in increased output and income. Customer satisfaction is an important qualitative aspect to evaluate. A modification in the vacuum engine might potentially reduce customer satisfaction, which could have a detrimental impact on future business sales. Although all of these are legitimate variables for a fuller review, just the engine department's manufacturing costs were provided for the case study. With the scant facts available, the only valid conclusion that can be reached is that the vacuum maker should continue to produce the engine because it is the less expensive option. Calculations

Reference

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html White, L. (2018, February 27). Use opportunity costs to improve manufacturing performance. Automationworld.com. https://www.automationworld.com/home/blog/13318401/use-opportunity-costs-to-improve-manufacturingperformance

Introduction Non-financial qualitative variables are vital for managers to consider when making choices. Certain activities make it hard to assess the results of qualitative elements. Managers often make decisions based on applicable expenses and revenues. Managers attempt to estimate future expenditures and income by making certain decisions and doing particular actions. (Hayes, 2020) According to Asthana (2020) Qualitative factors are:  Morale  Customers  Community Morale The influence on staff morale by adding a break room to the production area and providing an extra 30-minute break for launch and prayer in the afternoon, which boosts employee vitality, is vitally crucial for all successful businesses. When considering a vacuum manufacturing firm and its production expenses, morale may play a big part in lowering production costs, which results in not turning to a vendor with a high price. Also, we may mention Google cafeterias, where all employees can eat during the day, which revs them up and makes them feel incredibly active, and output will follow suit. Customers The consumer will be given the utmost priority in business all around the world. A company's consumers' opinions are a valuable asset. Based on the interaction approach with customers, create quality management systems with customers, customer relationship management, and customer experience management together, and an organization can develop robustly, which cannot be evaluated financially but will yield good results qualitatively. Community Motivation has been regarded as one of the most important qualitative elements. Some of them may include financial and non-financial benefits, as well as personal acknowledgment, personal growth, and working

conditions, among other things. Maintaining involvement and motivation may have positive results for the organization. Justified a situation where the qualitative factors would outweigh the quantitative results When making a decision, qualitative elements may trump quantitative outcomes. Assume, for example, that management at XYZ corporation expects that donor funding would decrease in the country after next year. As a result, they must reduce their workforce in order to complete a large project. Hiring local contractual workers is easier than hiring fixed-term staff, however they are not sufficiently qualified to meet international standards. Significant fixed-term staffs are frequently coupled with numerous additional facilities/costs such as pension, medical, insurance, and so on, which are extremely difficult to lower in the near run if the fund drops. As a result, the qualitative element of being able to immediately lower fixed-term personnel expenses by hiring local employees may outweigh the quantitative considerations. If the quantitative differential analysis for XYZ firm yields a different result, indicating that the company should hire local workers, management should evaluate qualitative variables before adopting this choice. Management must assess if the quality of short-term local personnel will be the same as that of fixed-term staff. Of course, the company's financial soundness must also be examined. It will not provide good outcomes if the personnel is abruptly reduced or changed. Rather, other donors who are prepared to contribute the firm alongside typical donors should be investigated. Because employee morale would suffer if any of them are let go due to a lack of funds, which will have a detrimental influence on the firm in the long run. When doing differential analysis, the qualitative elements would so dominate the quantitative results.

Reference Asthana, S. (2020). Accounting 3123 (Cost Analysis) Dr. Sharad Asthana Summer 2020. http://faculty.business.utsa.edu/sasthana/SHARAD/public/acc3123/coursepage.pdf. Hayes, A. (2020, August 28). ManagerialAccountingCourse.com. (2017). Differential/incremental analysis definition, method kind examples. https://www.managerialaccountingcourse.com/diferential.php...