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MBA Accounting Methods for Leaders # 2
Capella University
MBA Accounting Methods for Leaders MBA-FPX5010
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MBA Accounting Methods for Leaders #2
Introduction
Acme Pickle Company (Acme) is known for its pickles production and has distributed
it for eight years. It sells its products in stores located in the Southeastern US. In a month, Acme
produces 8,000 to 10,000 cases of pickles even though it can produce 12,000 without requiring
extra costs. Another company, Super Deals, wants to make a deal to purchase the pickles for
$9.50, which is less than the production cost. However, he argues it is for a special promotion
at their stores, which means they might need our services again. The cost for each pickle is
estimated at $10 each, which Acme's management fears might cause a severe loss. The purpose
of this report is to identify some errors I believe might have been made in the calculation of the
cost accounting and offer a recommendation on whether the company should accept the offer
from Super Deals at $9.50.
Variable Costs and Fixed Costs in Production
To make sales and generate profits and revenues, it must incur production costs, which
vary with time. Production can be categorized into two: short term and long term; for instance,
production generally requires labor, workers and capital, and equipment. In the short run, the
company can vary all factors of production. At the end, the company cannot change one of the
factors of production, primarily the capital. However, this is not a preferred method in dividing
the production costs for cost accounting. The best way is to differentiate them as either static
or changes with output or sales volume changes.
Fixed costs are fixed in that they do not vary with the level of output, profit, or sales
(Okpighe, 2015). However, as mentioned earlier, this mainly applies in the short run. In simpler
terms, the fixed costs remain constant even as firms increase or reduce their output levels. Fixed
costs are incurred even if the output is zero. They do not depend on the output levels of the
company and are not at the disposal of the company management (FreshBooks, 2018). Some
of these costs are machinery and equipment, buildings, and permanent employees. Take factory
buildings as an example. For a company to build them, they require a lot of time, hence not
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possible in the short run. Moreover, even if output levels decrease, the buildings will remain
there.
Variable costs are the opposite of fixed costs. They are the factors that vary with a
change in output or sales volume, mainly in the short-run (Okpighe, 2015). Some perfect
examples of these costs are labor-related, such as workers, fuel, and power. Take workers as
an example; if the company wants to expand its output in the short run, it can increase the
number of workers and fire them if production decreases. It is always important to differentiate
variable and fixed costs in business due to their importance in decision-making. For instance,
when pricing a product using the cost accounting method, fixed costs are not considered.
For Acme, "variable costs are cucumbers, spices and vinegar, jars and lids and direct
labor." All these costs depend on the amount of output the company produces. For example,
the number of cucumbers, vinegar, jars, and lids is directly related to the level of pickles
produced. The company can reduce the amount of these factors if it needs to reduce the output
and increase it if it wants to increase the total production. On the other hand, fixed costs include
"line supervisors, salary, property tax on factory, insurance on factory and depreciation on the
factory." Not all these factors depend on the amount of output. For example, Acme has to pay
property values even if the production level is zero. Every company is always determined to
sort out the fixed costs, to enhance profitability.
Breaking down costs into variable and fixed costs is critical in two ways, among others.
They form the primary ingredients in all types of accounting, including process-based costing
and activity costing (Hayes, 2021). Therefore, they are vital in the process of break-even
analysis, which identifies a profitable price and quantity for a company's goods. "It is calculated
by dividing fixed costs by price minus variable costs" (FreshBooks, 2018). Therefore, the
inability to categorize costs can compromise the entire model, affecting the decision-making
criteria (Hayes, 2021). The above model is essential when pricing and determining the
feasibility of other processes such as diversification and expansion (Hayes, 2021). For
entrepreneurs willing to acquire small businesses, the model is vital in determining future
profits.
Another importance is in determining economies of scale. Economies of scale are when
a company has an absolute cost advantage in market share in a particular industry. According
to Kenton (2021), companies achieve economies of scale by increasing output and lowering
costs due to the bulk of goods produced. Categorizing the costs is beneficial because it provides
information regarding the general cost structure for a company (FreshBooks, 2018). Noting the
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distinction between variable and fixed costs is critical for making rational decisions regarding
business expenditures, which directly influence the profitability of a business.
The Benefit of Recalculating the Cost of Pickle Production
It would be advisable to recalculate the costs using break-even analysis. It is a vital tool in
business because it forms a crucial part of profitable organizations' decision-making. Break-
even analysis is a point in business at which revenue equals total costs, which implies that the
industry is neither making profit nor loss (Priya, 2019, Marshall, McManus & Viele, 2017). At
this point, a company is aware of its profitable price and amount of output. A price or quantity
below the break-even point will automatically result to lead to a loss. On the other hand, the
higher the price and quantity above the break-even point, the higher the level of profits. In
simpler terms, the break-even point serves the same purpose as the shutdown price.
Pricing and costing are two accounting concepts that sometimes are hard to estimate.
However, with break-even analysis, companies can make innovative pricing and decision-
making. By using break-even analysis, companies can calculate the best price to enhance
profitability and cover costs incurred (Priya, 2019). This promotes rational decision-making,
which a paramount for all businesses. Companies can uncover hidden expenses with cost-
benefit analysis, which can cost the business much if not noticed (Priya, 2019). As discussed
earlier, categorizing production costs into fixed and variable expenses is beneficial in the
pricing process. By using break-even analysis, companies can easily cover their fixed costs,
which are crucial to prevailing. Since it gives a quantity and price that must be sold for
profitability, the break-even analysis method can hasten the realization of sales revenue and
targets (Priya, 2019). Acme is on the verge of attaining the benefits mentioned above by
adopting the break-even analysis as their pricing technique.
To recalculate the production costs for Acme, we will apply the break-even analysis,
which requires the total variable costs, fixed costs, and selling prices per unit. Fixed costs for
the company include line supervisors, depreciation on factory, property tax, and insurance on
the company, which add up to $24,000. On the other hand, "variable costs include cucumbers,
spices and vinegar, jars and lids, and direct labor," which adds up to $66,000. The recalculation
will use 2,000 cases since the Super Deals Company wants to purchase that amount. This is as
opposed to the entire company's production at 9,000 cases. As Marshall, McManus & Viele
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(2017) discusses, break-even analysis wishes to compare fixed costs and variable costs. The
goal of the company is first to cover the fixed costs to give room for profitability.
The variable cost per unit is $7.33 (given by $66,000/ 9000) for the Acme, and its price
is $10 is its selling price. Therefore, its break-even point is given by $24,000/ ($10-$7.33),
which gives 8,989 units. This means that the company will not profit until it sells more than
8989 units of the pickles. Moreover, it means that the company has to sell over 8,989 units of
pickles to be profitable at the $7.33 price. The Super Deals Company's break-even point is
$24,000/ ($9.50-$7.33), which yields 11,060 units. This indicates that the company will not
profit until they sell additional units to the 11,060 units. The company has to sell more than
11,060 units to gain profit.
Financial Accounting Vs. Managerial Accounting
The accounting process entails "summarizing, analyzing, and reporting these
transactions to oversight agencies, regulators, and tax collection entities" (Tuovila, 2020). It
involves reporting financial statements, statements of financial positions, and cash flows over
a particular period, mainly one year. All these statements measure the financial performance
of a company or business. Accordingly, accounting is the primary function of all companies.
Reports from the accounting process are the mainstream of rational and informed decision-
making and are legal and mandatory for large businesses, mainly government parastatals. There
are two main types of accounting, namely financial and managerial accounting. The two types
of accounting are much different from one another.
Financial accounting analyzes the health of a company or business and presents it to
the external stakeholders for their side of decision-making. Such stakeholders include potential
investors, creditors, debtors, and other financial institutions to assess business performance
over a specific period. Financial accounting is guided by international rules called "Financial
Accounting Standards Board (FASB) and generally accepted accounting principles (GAAP)"
(Graybeal, Franklin, & Dixon Cooper, 2018). This means that financial accounting is similar
across the globe. Information from financial accounting can be used to compare various
companies for decision-making processes. However, the information provided in the financial
accounting is not sufficient and is prepared late to be used for decision-making.
On the other hand, management accounting, also known as managerial accounting, is
used for internal uses, such as making decisions for daily operations. Another critical feature
is based on current and future trends, unlike financial accounting, based on financial history
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(Mason, 2017). For instance, when determining the pricing of a product or analyzing the
amount of revenue that a future product can earn, a company must go for management
accounting, such as break-even analysis. In addition, businesses rely on managerial accounting
for prediction and forecasting.
There are several differences between managerial accounting and financial accounting.
However, the two primary differences namely uses and reporting. First, financial accounting is
used for both internal and external purposes. Internally, businesses use accounting to make
decisions. Managers for operational decision-making use management accounting.
Management accounts are used to inform managers of current and future trends to make sound
decisions. Secondly, financial accounting is guided by GAAP since it is used externally, while
management accounting is prepared according to the needs of a manager. Management
accounting is based on estimates since most managers lack precise or accurate numbers.
In the business world, information is regarded as power and transforms decision-
making processes. Managerial accounting is undoubtedly more powerful than financial
accounting. It provides an analysis of statements, which assists decision-makers in their work.
Management accounting offers a critical tool to make businesses more profitable in a company
since it adds to practice knowledge. In addition, financial accounting is associated with several
drawbacks. First, it can be manipulated according to the businesses for various purposes, such
as evading taxes (Karmakar, 2015). In addition, financial accounting offers quantitative
information instead of management accounting, which provides both quantitative and
qualitative. Whereas management accounting deals with current and future trends, financial
accounting is historical (Karmakar, 2015). Managerial accounting analyses the current and
future trends of a business. Financial accounting is done after one-year ends, meaning it focuses
on historical data, which might not be helpful to decision-makers. This makes it possible to
control the costs in business, such as the problem Acme had with its cost accounting. It
considers things that have already been done while management accounting focuses tends on
forecasting and predicting. Moreover, the management accounts are prepared off the financial
statements, which might compromise decision-making.
Plan of action
Acme should accept the deal by the Super Deal Company. As recalculated using the
break-even analysis, Acme's break-even price and output points are $7.33 and 8,989 units,
respectively. This means that it should ensure it sells its products at $7.33 per unit and it sells
more than 8,989 units for profitability. Super Deals Company offered $9.50, which is way too
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high than the production cost. The production cost at $10 was probably set using financial
accounting, which might have disregarded the categorization of the production costs. The
company produces an average of 9,000 units of pickles, which is higher than the break-even
quantity. Therefore, if it sells the product at $7.33 to the Super Deals, the profits per unit shall
be ($9.50 -$7.33), which is a substantial amount given it is only a deal.
Furthermore, the break-even analysis indicates that the company can raise products
quantity to increase profitability. The break-even point suggests that the company can produce
any amount above it to increase its profits. Given that it can produce up to 12,000 units without
adding extra costs, Acme Pickle Company should make the 12,000 to realize more
profits. Since the maximum production capacity is 12,000 cases, the company should have an
additional 2,000 cases for the Super Deal and continue selling to other clients at the average
price. This will allow them to obtain future profits.
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References
FreshBooks. (2018). The Difference Between Fixed Cost and Variable Cost - Explained.
Retrieved from FreshBooks website:
https://www.freshbooks.com/hub/accounting/fixed-cost-vs-variable-cost
Graybeal, P., Franklin, M., & Dixon Cooper. (2018, July 24). Distinguish between Financial
and Managerial Accounting. Retrieved from Opentextbc.ca website:
https://opentextbc.ca/principlesofaccountingv2openstax/chapter/distinguish-between-
financial-and-managerial-accounting/
Hayes, A. (2021). Break-Even Analysis. Retrieved from Investopedia website:
https://www.investopedia.com/terms/b/breakevenanalysis.asp
Karmakar, R. (2015, October 26). 10 Major Limitations of Financial Accounting. Retrieved
from Your Article Library website: https://www.yourarticlelibrary.com/financial-
accounting-2/10-major-limitations-of-financial-accounting/65347
Kenton, W. (2021, April 10). Economies of Scale. Retrieved from Investopedia website:
https://www.investopedia.com/terms/e/economiesofscale.asp
Mason, M. (2017, June 28). What are the Differences Between Financial Accounting and
Management Accounting? | Bentley University. Retrieved from www.bentley.edu
website: https://www.bentley.edu/news/what-are-differences-between-financial-
accounting-and-management-accounting

Unformatted Attachment Preview

1 MBA Accounting Methods for Leaders # 2 Capella University MBA Accounting Methods for Leaders – MBA-FPX5010 2 MBA Accounting Methods for Leaders #2 Introduction Acme Pickle Company (Acme) is known for its pickles production and has distributed it for eight years. It sells its products in stores located in the Southeastern US. In a month, Acme produces 8,000 to 10,000 cases of pickles even though it can produce 12,000 without requiring extra costs. Another company, Super Deals, wants to make a deal to purchase the pickles for $9.50, which is less than the production cost. However, he argues it is for a special promotion at their stores, which means they might need our services again. The cost for each pickle is estimated at $10 each, which Acme's management fears might cause a severe loss. The purpose of this report is to identify some errors I believe might have been made in the calculation of the cost accounting and offer a recommendation on whether the company should accept the offer from Super Deals at $9.50. Variable Costs and Fixed Costs in Production To make sales and generate profits and revenues, it must incur production costs, which vary with time. Production can be categorized into two: short term and long term; for instance, production generally requires labor, workers and capital, and equipment. In the short run, the company can vary all factors of production. At the end, the company cannot change one of the factors of production, primarily the capital. However, this is not a preferred method in dividing the production costs for cost accounting. The best way is to differentiate them as either static or changes with output or sales volume changes. Fixed costs are fixed in that they do not vary with the level of output, profit, or sales (Okpighe, 2015). However, as mentioned earlier, this mainly applies in the short run. In simpler terms, the fixed costs remain constant even as firms increase or reduce their output levels. Fixed costs are incurred even if the output is zero. They do not depend on the output levels of the company and are not at the disposal of the company management (FreshBooks, 2018). Some of these costs are machinery and equipment, buildings, and permanent employees. Take factory buildings as an example. For a company to build them, they require a lot of time, hence not 3 possible in the short run. Moreover, even if output levels decrease, the buildings will remain there. Variable costs are the opposite of fixed costs. They are the factors that vary with a change in output or sales volume, mainly in the short-run (Okpighe, 2015). Some perfect examples of these costs are labor-related, such as workers, fuel, and power. Take workers as an example; if the company wants to expand its output in the short run, it can increase the number of workers and fire them if production decreases. It is always important to differentiate variable and fixed costs in business due to their importance in decision-making. For instance, when pricing a product using the cost accounting method, fixed costs are not considered. For Acme, "variable costs are cucumbers, spices and vinegar, jars and lids and direct labor." All these costs depend on the amount of output the company produces. For example, the number of cucumbers, vinegar, jars, and lids is directly related to the level of pickles produced. The company can reduce the amount of these factors if it needs to reduce the output and increase it if it wants to increase the total production. On the other hand, fixed costs include "line supervisors, salary, property tax on factory, insurance on factory and depreciation on the factory." Not all these factors depend on the amount of output. For example, Acme has to pay property values even if the production level is zero. Every company is always determined to sort out the fixed costs, to enhance profitability. Breaking down costs into variable and fixed costs is critical in two ways, among others. They form the primary ingredients in all types of accounting, including process-based costing and activity costing (Hayes, 2021). Therefore, they are vital in the process of break-even analysis, which identifies a profitable price and quantity for a company's goods. "It is calculated by dividing fixed costs by price minus variable costs" (FreshBooks, 2018). Therefore, the inability to categorize costs can compromise the entire model, affecting the decision-making criteria (Hayes, 2021). The above model is essential when pricing and determining the feasibility of other processes such as diversification and expansion (Hayes, 2021). For entrepreneurs willing to acquire small businesses, the model is vital in determining future profits. Another importance is in determining economies of scale. Economies of scale are when a company has an absolute cost advantage in market share in a particular industry. According to Kenton (2021), companies achieve economies of scale by increasing output and lowering costs due to the bulk of goods produced. Categorizing the costs is beneficial because it provides information regarding the general cost structure for a company (FreshBooks, 2018). Noting the 4 distinction between variable and fixed costs is critical for making rational decisions regarding business expenditures, which directly influence the profitability of a business. The Benefit of Recalculating the Cost of Pickle Production It would be advisable to recalculate the costs using break-even analysis. It is a vital tool in business because it forms a crucial part of profitable organizations' decision-making. Breakeven analysis is a point in business at which revenue equals total costs, which implies that the industry is neither making profit nor loss (Priya, 2019, Marshall, McManus & Viele, 2017). At this point, a company is aware of its profitable price and amount of output. A price or quantity below the break-even point will automatically result to lead to a loss. On the other hand, the higher the price and quantity above the break-even point, the higher the level of profits. In simpler terms, the break-even point serves the same purpose as the shutdown price. Pricing and costing are two accounting concepts that sometimes are hard to estimate. However, with break-even analysis, companies can make innovative pricing and decisionmaking. By using break-even analysis, companies can calculate the best price to enhance profitability and cover costs incurred (Priya, 2019). This promotes rational decision-making, which a paramount for all businesses. Companies can uncover hidden expenses with costbenefit analysis, which can cost the business much if not noticed (Priya, 2019). As discussed earlier, categorizing production costs into fixed and variable expenses is beneficial in the pricing process. By using break-even analysis, companies can easily cover their fixed costs, which are crucial to prevailing. Since it gives a quantity and price that must be sold for profitability, the break-even analysis method can hasten the realization of sales revenue and targets (Priya, 2019). Acme is on the verge of attaining the benefits mentioned above by adopting the break-even analysis as their pricing technique. To recalculate the production costs for Acme, we will apply the break-even analysis, which requires the total variable costs, fixed costs, and selling prices per unit. Fixed costs for the company include line supervisors, depreciation on factory, property tax, and insurance on the company, which add up to $24,000. On the other hand, "variable costs include cucumbers, spices and vinegar, jars and lids, and direct labor," which adds up to $66,000. The recalculation will use 2,000 cases since the Super Deals Company wants to purchase that amount. This is as opposed to the entire company's production at 9,000 cases. As Marshall, McManus & Viele 5 (2017) discusses, break-even analysis wishes to compare fixed costs and variable costs. The goal of the company is first to cover the fixed costs to give room for profitability. The variable cost per unit is $7.33 (given by $66,000/ 9000) for the Acme, and its price is $10 is its selling price. Therefore, its break-even point is given by $24,000/ ($10-$7.33), which gives 8,989 units. This means that the company will not profit until it sells more than 8989 units of the pickles. Moreover, it means that the company has to sell over 8,989 units of pickles to be profitable at the $7.33 price. The Super Deals Company's break-even point is $24,000/ ($9.50-$7.33), which yields 11,060 units. This indicates that the company will not profit until they sell additional units to the 11,060 units. The company has to sell more than 11,060 units to gain profit. Financial Accounting Vs. Managerial Accounting The accounting process entails "summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities" (Tuovila, 2020). It involves reporting financial statements, statements of financial positions, and cash flows over a particular period, mainly one year. All these statements measure the financial performance of a company or business. Accordingly, accounting is the primary function of all companies. Reports from the accounting process are the mainstream of rational and informed decisionmaking and are legal and mandatory for large businesses, mainly government parastatals. There are two main types of accounting, namely financial and managerial accounting. The two types of accounting are much different from one another. Financial accounting analyzes the health of a company or business and presents it to the external stakeholders for their side of decision-making. Such stakeholders include potential investors, creditors, debtors, and other financial institutions to assess business performance over a specific period. Financial accounting is guided by international rules called "Financial Accounting Standards Board (FASB) and generally accepted accounting principles (GAAP)" (Graybeal, Franklin, & Dixon Cooper, 2018). This means that financial accounting is similar across the globe. Information from financial accounting can be used to compare various companies for decision-making processes. However, the information provided in the financial accounting is not sufficient and is prepared late to be used for decision-making. On the other hand, management accounting, also known as managerial accounting, is used for internal uses, such as making decisions for daily operations. Another critical feature is based on current and future trends, unlike financial accounting, based on financial history 6 (Mason, 2017). For instance, when determining the pricing of a product or analyzing the amount of revenue that a future product can earn, a company must go for management accounting, such as break-even analysis. In addition, businesses rely on managerial accounting for prediction and forecasting. There are several differences between managerial accounting and financial accounting. However, the two primary differences namely uses and reporting. First, financial accounting is used for both internal and external purposes. Internally, businesses use accounting to make decisions. Managers for operational decision-making use management accounting. Management accounts are used to inform managers of current and future trends to make sound decisions. Secondly, financial accounting is guided by GAAP since it is used externally, while management accounting is prepared according to the needs of a manager. Management accounting is based on estimates since most managers lack precise or accurate numbers. In the business world, information is regarded as power and transforms decisionmaking processes. Managerial accounting is undoubtedly more powerful than financial accounting. It provides an analysis of statements, which assists decision-makers in their work. Management accounting offers a critical tool to make businesses more profitable in a company since it adds to practice knowledge. In addition, financial accounting is associated with several drawbacks. First, it can be manipulated according to the businesses for various purposes, such as evading taxes (Karmakar, 2015). In addition, financial accounting offers quantitative information instead of management accounting, which provides both quantitative and qualitative. Whereas management accounting deals with current and future trends, financial accounting is historical (Karmakar, 2015). Managerial accounting analyses the current and future trends of a business. Financial accounting is done after one-year ends, meaning it focuses on historical data, which might not be helpful to decision-makers. This makes it possible to control the costs in business, such as the problem Acme had with its cost accounting. It considers things that have already been done while management accounting focuses tends on forecasting and predicting. Moreover, the management accounts are prepared off the financial statements, which might compromise decision-making. Plan of action Acme should accept the deal by the Super Deal Company. As recalculated using the break-even analysis, Acme's break-even price and output points are $7.33 and 8,989 units, respectively. This means that it should ensure it sells its products at $7.33 per unit and it sells more than 8,989 units for profitability. Super Deals Company offered $9.50, which is way too 7 high than the production cost. The production cost at $10 was probably set using financial accounting, which might have disregarded the categorization of the production costs. The company produces an average of 9,000 units of pickles, which is higher than the break-even quantity. Therefore, if it sells the product at $7.33 to the Super Deals, the profits per unit shall be ($9.50 -$7.33), which is a substantial amount given it is only a deal. Furthermore, the break-even analysis indicates that the company can raise products quantity to increase profitability. The break-even point suggests that the company can produce any amount above it to increase its profits. Given that it can produce up to 12,000 units without adding extra costs, Acme Pickle Company should make the 12,000 to realize more profits. Since the maximum production capacity is 12,000 cases, the company should have an additional 2,000 cases for the Super Deal and continue selling to other clients at the average price. This will allow them to obtain future profits. 8 References FreshBooks. (2018). The Difference Between Fixed Cost and Variable Cost - Explained. Retrieved from FreshBooks website: https://www.freshbooks.com/hub/accounting/fixed-cost-vs-variable-cost Graybeal, P., Franklin, M., & Dixon Cooper. (2018, July 24). Distinguish between Financial and Managerial Accounting. Retrieved from Opentextbc.ca website: https://opentextbc.ca/principlesofaccountingv2openstax/chapter/distinguish-betweenfinancial-and-managerial-accounting/ Hayes, A. (2021). Break-Even Analysis. Retrieved from Investopedia website: https://www.investopedia.com/terms/b/breakevenanalysis.asp Karmakar, R. (2015, October 26). 10 Major Limitations of Financial Accounting. Retrieved from Your Article Library website: https://www.yourarticlelibrary.com/financialaccounting-2/10-major-limitations-of-financial-accounting/65347 Kenton, W. (2021, April 10). Economies of Scale. Retrieved from Investopedia website: https://www.investopedia.com/terms/e/economiesofscale.asp Mason, M. (2017, June 28). What are the Differences Between Financial Accounting and Management Accounting? | Bentley University. Retrieved from www.bentley.edu website: https://www.bentley.edu/news/what-are-differences-between-financialaccounting-and-management-accounting Name: Description: ...
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