Alpha Manufacturing Firm Report (Essay Sample)

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Alpha Manufacturing Firm Report
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Table of Content
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I. Introduction  PAGEREF _Toc413842456 \h
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II. Analysis  PAGEREF _Toc413842457 \h
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A. Elements of cost  PAGEREF _Toc413842458 \h
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B. Fixed costs and variable costs requirements  PAGEREF _Toc413842459 \h
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C. Pricing Method  PAGEREF _Toc413842460 \h
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D. Implication of bank loan as source of capital  PAGEREF _Toc413842461 \h
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E. The need for forecasting  PAGEREF _Toc413842462 \h
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F. Comment on the possibility of making good business  PAGEREF _Toc413842463 \h
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G. Importance of management Accounting  PAGEREF _Toc413842464 \h
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H. How management accounting is different from financial accounting  PAGEREF _Toc413842465 \h
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III. Conclusion  PAGEREF _Toc413842466 \h
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IV. Appendices  PAGEREF _Toc413842467 \h
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A. Difference between fixed and variable costs  PAGEREF _Toc413842468 \h
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B. Break-even Chart  PAGEREF _Toc413842469 \h
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C. Sales Budget  PAGEREF _Toc413842470 \h
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D. Production Budget  PAGEREF _Toc413842471 \h
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E. Cash Budget  PAGEREF _Toc413842472 \h
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V. List of references  PAGEREF _Toc413842473 \h
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Introduction
This is a report that covers a business plan for formation of Alpha Manufacturing plant. The proposed plant will produce sport goods for the local, national and international markets. The plant will borrow loan of £50,000 from a local bank at 8% interest rate. This report covers the elements of costs for the new plant, the fixed and variable costs requirements, the pricing method, and the implication of the bank loan. The report also explores forecasting of the plant in its first three months of operation. This is done using cash budget, production budget and sales budget. Lastly, the paper gives the importance of management accounting to the firm and demonstrates its difference from financial accounting.
Analysis
Elements of cost
Three elements of cost will be included in the cost statement. They are material, labour and expenses. Each of these is further subdivided into two: direct and indirect. Thus, there will be direct material, direct labour, and direct expenses. These three together constitute the prime cost. The second classification will have indirect material, indirect labour, and indirect expenses. Together, these three constitute factory or works overhead (Adler, 1999).
Direct material refers to the material out of which a product is manufactured and can be conveniently identified with or allocated to cost units or centres (Chakraborty, 2004). In my case, the direct materials involved in the manufacturing of sports products include wood, leather, polish, and cloth.
Direct wages are the wages paid to workers who actually produce goods and can be conveniently allocated to cost units or centres (Davis & Davis, 2011). In my case, it will include payment for labour for the skilled and the unskilled workforce of the firm.
Direct expenses will constitute all the expenses that will be wholly or exclusively necessary for the production of sports goods (Dutta, 2009). Overheads will have the indirect expenses that will be incurred at various parts of the manufacturing plant. Overheads will further be divided into factory overhead, administration overhead, selling overhead, and distribution overhead. For the case of my manufacturing plant, the overheads will constitute factory lighting, factory rent, and factory cleaning as factory overhead. It will also have administration expenses, interest payment and office rent under administration overhead, selling expenses under selling overhead and delivery van expenses under distribution overhead (Hansen & Mowen, 2011).
Fixed costs and variable costs requirements
According to behaviour, the manufacturing plant will have its costs classified as either fixed costs or variable costs (Kinney & Raiborn, 2013). Fixed costs will include overhead expenses that will remain fixed irrespective of the output level. The items that will be included in the fixed cost are: rent of the factory and the office, bank interest, administration expenses, and factory lighting expenses. Semi-variable costs will include costs that vary with output but not proportionately. Here, the costs that will be included are cleaning expenses, selling expenses and delivery van expenses. In the variable expenses the plant will have the direct materials needed like wood, cloth, leather, and polish. It will also have direct wages for both the skilled and unskilled labour.
Pricing Method
In determining the price of the product, marginal and absorption costs are considered. Absorption costing treats all the costs involved in manufacturing, both fixed and variable as product costs whereas marginal costing takes into consideration only the variable manufacturing costs of the product. Marginal cost is the increase in costs as when the firm produces an additional unit. In setting the price of goods, I computed the break even sales price. This is important in determining the minimum price the firm can sell its products and cover its costs at the same time (Horngren et al., 2000). Through this method, the price at which the firm will earn zero profits can be determined assuming that the specified number of units of the goods is sold in the specified markets (Coombs et al., 2005). Since marginal costing does not include fixed costs, it will give different break-even price from absorption costing.
The break-even price using absorption costing will be higher amount equal to fixed cost per unit. This means that the firm will have to sell a unit at a little higher price in order to realize profits. However, the firm will have to consider the market price of the goods (Maher et al., 2012).
There are assumptions that were made in coming up with this sale price. One of the assumptions is that the industry at large charge around the same price (Mitra, 2009). It is also assumed that the total number of goods produced will sold in the three markets; the local, national and international markets. In reality, the true number of units sold may vary; therefore, the actual break-even point may be different (Weygandt et al., 2010). Another assumption made was that there was no overtime for the workers of the firm. The workers participated in production only in the normal hours of operations. This means that there was no cost spent on overtime by the firm.
Implication of bank loan as source of capital
The business will borrow a loan of £50,000 from a local bank. This funds will enable the business acquire the machines necessary for production of products. Borrowing capital from bank implies that the firm will be able to meet its costs of running the manufacturing plan (Vanderbeck, 2012). It also means that the firm will be paying bank interest to the bank annually or monthly as agreed between the bank and the firm. Therefore, the business has to succeed in its activities in order to meet payment of its debts in full and in time (Pizzey, 1989). The firm must fully meet the target of 6000 units per month for the demand in local, national and international market. Failure to meet these targets can have disastrous consequences for the firm. This may make the firm fail to pay its loan on time. Securing loans in future for expansion might be difficult since the credit worthiness of the firm will be destroyed. In the case the firm uses assets as security for the loan, it can be lost if the firm fails to pay its debts.
The need for forecasting
Forecasting of revenues, expenses and cash flows will necessary (Riahi-Belkaoui, 2001). The bank will need this information in order to grant the business the loan needed. Forecasting of these major activities of the firm will enable the firm identify the amount and origin of money coming into the business and also the amount going out. The business needs carefully budget the revenues and expenses needs. Through forecasting, the business will be able to make informed decisions about the future (Reddy, 2004). It is anticipated that there will be higher demand during sports seasons like the Olympic and FIFA World Cup.
Through forecasting the firm will accurate plans for the materials the firm needs. This is in relation to the seasonality of the demand of goods. There are seasons where demand for the goods is high and the firm might need more materials and labour. The firm will not want to miss opportunity by running out of materials during a busy season (Nigam & Jain, 2001). Forecasting will thus help the firm make sales prior to busy seasons to avoid scrambling or even paying extra for the materials needed. On the other hand, the firm will not want to overstock. Through forecasting of revenues and demand, the firm will be able to make informed decisions on what it needs, the number it needs and the time the firm needs the materials (Mitra, 2009).
Forecasting is also important in helping the firm manage the workforce effectively. The firm will be able to keep schedule the activities of the business well and through this be able to maintain respectful and open dialogue with the workers, both the skilled and unskilled (Rich et al., 2009...