FINANCIAL PRINCIPALS AND TECHNIQUES

Managing Financial Principals and Techniques

Managing Financial Principals and Techniques

Question 1

Income Statement for Absorption Costing



Accounting Values

Sales (30*4,600)Less Costs:

Direct Material X (5*6,240)

Direct Material Y (7*7,280)

Direct Labour

Fixed Factory Overheads

Gross Profit

£

138,000

31,200

50,960

31,200

17,264

7,376



Income Statement for Marginal Costing



Accounting Values

Sales (30*4,600)Less Costs:

Direct Material X (5*6,240)

Direct Material Y (7*7,280)

Direct Labour

Contribution per Margin

Fixed Factory Overheads

Gross Profit

£

138,000

31,200

50,960

31,200

24,640

17,264

7,376

(b) The importance of Absorption Costing has been quite high in most of the organizations. In today's competitive economy, manufacturing companies have to be careful not to put money and resources in an investment that cannot yield an appropriate return and one must realize that cost analysis is a tool to determine if an investment is a good or a bad business; therefore, most manufacturing companies are careful as they face a number of decisions that can directly or indirectly affect the cost of goods sold (COGS). Whether the manufacturing company is a large company or a small company, cost analysis is important. Some of the direct decisions that managers make involve material selection, manufacturing process selection, man hours required, and machine hours required. Some of the indirect decisions involve maintenance, turnover, quality, and administration. At the end, a bad business deal occurs when the costs to provide a given product or service are underestimated, and thus a loss of capital and investment is inflicted on the company. Alternately, when the costs are overestimated the company is not able to compete in the market. Good business occurs when the investment of resources to provide a service or goods (cost) produces a return with an increase, cost + profit = price, yet the price of the service or product is competitive in the market. Therefore, cost estimation is a crucial to the success of a company's financial well being (Archambault, 2003, 194).

The cost determined by the system include: labour costs, tooling costs, machining cost, and overhead costs. Given the importance of cost estimation in manufacturing job bidding, cost estimation is a field that has been well investigated. The costs determined in the model are: set-up cost, material handling cost and investment cost. The Activity Based Costing (ABC) method was used in batching mode, together with mixed integer linear programming with binary variables and integer variables. They divide overhead into 5 activity centres: tooling, load/unload, material handling, inventory, and other. In similar manner, the researchers known as Culler and Burd in 2007 integrate manufacturing processes with business features (ABC) for cost estimation. The literature also focused on how they can also analyze and estimate cost with the help of accounting techniques such as Activity Based Costing (ABC). There is also a wide venue that a manufacturing company can take in respect to the available approaches of expert systems, the knowledge-based approach, and the case-based approach, the multi-agent based approach, among others mentioned before; however, there is no information of the cost absorbed by a company to employ a cost estimation expert system and how it may be of assistance (Bonner, Hesford, Van der Stede & Young, 2006, ...