Reflection on the Simulation Results
Aunt Connie’s Cookie is a family owned business that is presently performing well by selling its cookies throughout the east and Midwest region. The company is currently reviewing its cost strategies to maximize firm’s contribution margin and operating profits.
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This report is prepared after carefully analyzing basis for different business decisions the company can undertake and possible costing strategies that the company may give consideration to for generating better profits.
The problem that the company is facing is that with higher prices the company’s sales fell. From the previous data it could be observed that sales were at maximum when prices of cookies were at minimum. The company is considering different ways to maximize its contribution margin and operating profits as suggested by Maria Villanueva who is the CEO of the company.
She is of the opinion that the company can decrease price, increase advertisement expenditure, or increase payment to distributors. However, it must be understood it is important to decide upon an optimum combination of price, advertisement and distributor payment to achieve the desired gorals.
Price reduction and distributor payment have direct impact on the contribution margin whereas advertisement expenditure that is not variable is likely to have positive impact on sales.
A decision over production volumes surely depends upon factors such as utilization capacity of the production unit, sales loss from the current market and impact on the overall profit of the company.
From the current data the company’s overall profit from its current sales is $1,550,000 however if the current production is adjusted to accept the order we can observe no change on Unit CM however total CM is affected and its profits. Accepting the bulk order is not advisable as it is generating less profit after adjustment to current production volumes.
Purchasing new unit and utilizing its capacity to produce additional 600,000 packs of lemon creame cookies that have higher CM is likely to increase profits therefore its advised to buy the unit and carry out modifications to produce more of lemon creame cookies.
Indifference level between two types of production results in the same level of cost and therefore profits are same. In this case forecast production of the new cookie is 1,000,000 packs and indifference level is also at the same level therefore we can choose either labor intensive manufacturing or equipment intensive. However, this decision will change if forecast demand for new product rises.
The simulation presents three learning points that are fixed costs, variable costs, and breakeven point. These are important for understanding the relationship of different types of costs that business may incur in order to operate their business. It is understood that some of the costs are clear identifiable and some are not that makes the costing procedure rather difficult and business make use of different methods to record and manage their cost of products.
Understanding the difference between fixed costs that do not change with the level of activity and variable costs that change with the activity level of the business is important to identify costs accordingly and apply them for predicting future estimated values.
Furthermore, breakeven point is also understood from the simulation which suggests a level of activity where the business is incurring no loss or profit. These three learning element allow to understand the operating performance of any business and therefore essential parts of learning cost management.
Cost Accounting Systems
Aunt Connie’s Cookies could utilize cost accounting systems that are referred to as the accounting systems that provide information that could help businesses to estimate their cost of productions.
Such systems contain information that could help businesses in making both short and long term strategic decisions and allow them in planning and controlling their production activities to achieve the objectives set out in relation to managing costs of production.
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A cost accounting system is defined as ‘a system that accumulated cost, ascertain cost of products/jobs, and prepares cost information reports using some produces and principles for recording cost data” (Khan & Jain, 2008, p. 1.18).
Such cost accounting systems can be implemented by Aunt’s Connie Cookies after evaluation of their suitability, economibility and timeliness in order to be able to make better predictions and respond to the changing needs of the business more swiftly.
For cost accounting systems five elements are required for enabling efficient decision making. These include
- an input measurement basis
- an inventory valuation method
- a cost accumulation method
- a cost flow assumption,
- a capability of recording inventory cost flows at certain intervals (Martin, 1992).
Aunt’s Connie’s Cookies can use cost accounting systems to determine the optimal price level that allows efficient balance between cost, volume and profit of the business. of Aunt Connie’s Cookies can use different input measurement basis including
- pure historical costing that is based on observed and recorded costs for various cost inputs from previous months to determine the cost of production
- normal historical costing that allows use of historical costs for direct labor and direct material but overhead is charged based on predetermined rate applied to the actual activity level,
- standard costing involves applying standard or predetermined rates to ascertain manufacturing costs and any difference between actual and applied rate would require variance analysis.
The identified levels of variances between actual and projected costs allow assessment of the company’s efficiency on the whole and not necessarily deals with determining the pricing of products.
It could, nonetheless, help in determining how much Aunt Connie’s Cookies receives for every dollar it spends in comparison to the total industry. It could also be beneficial for Aunt Connie’s Cookies to utilize full cost accounting in order to figure out the environmental or social costs that are linked to the company.
Aunt Connie’s Cookies can use different valuation methods that could yield in different estimates of costs. Aunt Connie’s Cookie could utilize traditional cost accounting that allows use of a combination of direct labor and direct material costs to be allocated to each product produced by the company. It would assume that the more cookies are created, the more overhead there will be.
This would be a simple approach for Aunt Connie’s Cookies, but it may not necessary provide them with sufficient data to properly determine their product costs. Aunt Connie’s Cookies could use activity-based costing, in order to examine its costs by type of activity instead of end product.
Unlike the traditional method, it would let the company analyze the overall systems with more detail in order for them to see if there are cost inefficiencies. It would be particularly helpful for Aunt Connie’s Cookies if its indirect costs are greater than its direct costs. If Aunt Connie’s Cookies were to utilize activity-based accounting, it would first need to identify its activities, and then designate a cost to each activity (Martin, 1992).
Once that is completed, a determination of the components of each cost must take place, followed by data collection for every activity. Finally, the product costs can also be determined by dividing the business into different cost centers according to the level of activities they perform. This allows costing on the basis of batches produced, product-supporting activities, and facility-supporting activities (Martin, 1992)..
Total cost analysis and life-cycle cost analysis can also be used by Aunt Connie’s Cookies. This would help the company examine its products. It is, however, typically a component of activity activity-based costing, although it can be used by itself.
Life cycle cost analysis is useful during the development of a product and its costing as this allows determine the cost contribution at each state of production. Total cost analysis, nonetheless, would probably be the most beneficial since it is primarily used for purchasing decisions.
With the use of cost accounting system Aunt Connie’s Cookie can maintain a perpetual record of cost incurred and it would allow the business to draw useful information deemed necessary for estimating expected costs of production.
Khan, P. Y., & Jain, P. K. (2008). Cost accounting and financial management for CA Professional Competence Examination. New Dehli: Tata McGraw-Hill.
Martin, J. R. (1992). What is a Cost Accounting? Retrieved from Management and Accounting Web: https://maaw.info/Chapter2.htm