Accounting for Managers Contribution Margin

Question: Describe about the Accounting for Managers of Contribution Margin. Answer: Introduction: Management account is the process of preparing reports for management and accounts that provide accurate statistical information in time, required by managers to make day to day short term decisions. Management accounting reports show the available cash; sales revenue generated, accounts payable, accounts receivable, outstanding debts, raw materials, inventory, variance analysis and other statistics. The role of accounting is to support competitive decision making by communicating information that helps management plan, control and evaluate the business strategy. According to the (Roszkowska-HoÅ‚ysz, 2013). The ability to develop and use good management, accounting is an important ability for individuals, operation and marketing managers and information technologist. Management accounting plays a key role in organisations. Management accounting is significantly affected by dramatic improvements in computer technology. The current study attempts to evaluate the significance of management accounts in the fast food sector. It further attempts to scrutinise on the balance score card of Steve Roger's Delicacy. Various frameworks are determined to analyse the triple bottom line initiatives undertaken by the management. The theories like the Weighted Average Contribution Margin (WACM), Contribution Margin Ratio (CMR) are initiated to configure the sales lines approaches. Furthermore, the factors like the operating leverage, safety margin and the risk determined are examined to understand the financial efficacy of the chosen business. The entire analysis consists of forecasting for not only next year but also subsequent 2 more years. Balanced Score Card approach: The balanced scorecard approach is a strategic planning and management system that is used worldwide by industry and business, government and non-government organisation to improve internal and external communications, and monitor organisational performance against strategic goals. The approach is originated by Dr Robert Kaplan and David Norton. The balance scorecard approach incorporates the following points to measure a businesss viability. They are as follows: Customer/stakeholder perspective (satisfaction) The main objective of any business is to earn a profit. The profit is gained through lowering costs and increase revenue. The revenue will increase when sales increase, and sales increases when customer are satisfied with the end product. According to the Wilsey (2016), Steve Rogers restaurant should focus on customer satisfaction. The growth and stability of any business depend on the level of customer satisfaction it acquires. In the food, business satisfaction varies from customer to customer, for their varied tastes and preferences. Thus successful business depends on efficiently catering to the different needs of the customer in time. Internal business process Internal business process helps managers to evaluate how efficiently and effectively the business will run Sabry (2014). Employee satisfaction, proper working hours and condition, sanitised environment, etc. Thus internal business process or internal operations is of paramount importance in the smooth running of business. The food business requires utmost care, how the food is made and delivered to the customer, factoring in the time aspect throughout the process (Prez et al. 2013)). The objective of any food business is to earn customer satisfaction. Innovation and learning perspective (Organizational capacity) The smooth running of a business depends on an efficient workforce Shaughnessy (2010). Learning and innovation are great tools for building a skilled workforce. In the food industry, experience and training are crucial as it deals with people's health. The training of trainees should be detailed and proper, and innovation should play a significant role in the training process. Innovation enhances the skill of a worker together with learning. On the other hand, introducing employees with technologically high equipment increases their knowledge about the job (Quesada Gazo, 2007). Ethics is also a major part of the learning process; therefore appropriate ethical conduct helps to build a proper working environment and skilled workforce. Financial/Stewardship (Financial performance) As per the statement of (Pilcher Van Der Zahn, 2010)) the key objective of any business organisation is to maximise their profit, by lowering the cost and increasing sales, earning more revenue. The food industry is thriving nowadays, Steve Rogers restaurant should incorporate initial cost to be incurred, for raw materials, fixed asset, fixed variable cost, administrative and operational expense and marketing and promotional expense, before commencement of business to ascertain the profitability, growth and future prospect of the business. The above points can be explained from Figure 1 below: Figure 1: Balance score card approach (Source: balancedscorecard.org, 2016) Triple bottom line initiatives: According to the (Elenbaas (2015), the framework to measure corporate performance incorporates the triple bottom line approach. Sustainability is one of the goals of businesses, non-profit organisations and government organisations. The triple bottom line initiative underlines three dimensions of performance: Social Environmental Financial Triple bottom line approach differs from traditional reporting frameworks, as it includes environmental and social measures which are difficult to measure. Triple bottom line (TBL) initiatives are also called the three Ps (people, planet and profit). The sustainability of a company and its impact on the organisational world is greatly dependent on profitability, shareholders value, human and ecological factors. The dimensions of performance (social, environmental and financial) can further be elaborated by points stated below. Financial variables Financial variable are variables that deal with the flow of money in an organisation or this case, Steve Rogers restaurant. The business can look at various financial factors. Specific examples include: Personal income Cost of underemployment Establishment size Growth in job Employment distribution Revenue contributing to gross state profit Environmental measures Environmental variables should incorporate measurement of natural resources that reflects the businesses viability. The environmental measures should also factor in air and water quality, consumption of energy and natural resources and solid and toxic waste. Specific examples include Priority pollutants Electricity consumption Fossil fuel consumption Solid waste management Hazardous waste management Social measures Social measures include participation in the community, access to social resources, health, well-being and quality of life. Few vaUnemployment rate Female workforce participation rate Median household income Percentage of educated youth Average communication time Violent crimes per capita Figure 2: Triple Bottom Line Initiative (Source: Barter, 2015, 198) From the above explanation of the three dimensions, Steve Rogerss restaurants management can factor in few of the variable into its business plan to achieve sustainability and a promise of growth (Bohmholdt, 2014)). Sales budget for the products The sales budget contains an itemization of company's sales expectation for a period. The sale budget is presented in a monthly format. The calculation of sales budget is to itemise the unit sales expected in one row and list the expected unit price in the next row. The appendix below depicts the sales budget of two products, Barbecued Shrimp (A) and Sausage Rolls (B) for the FY 2016. It is assumed that the sales have been increasing gradually throughout the year, the price per unit for product A is assumed at $12, and a monthly breakup is shown for each product. The price per unit of product B is assumed at $10. From the appendix below, it is seen that product A (Barbecued Shrimp) contributes to a major portion of sales, which is 65% of total sales. Direct material budget is prepared to calculate the materials that must be purchased, to fulfil the requirements of the production budget. It is presented in either a monthly or quarterly format in the annual budget. According to the Shuai Tang (2014) the direct material budget for product A (Barbecued Shrimp) is significantly higher than product B (Sausage Rolls), it is because Barbecued shrimp enjoys a larger portion of sales margin compared to Sausage rolls. Due to the large sales volume of Barbecued shrimp, the volume of materials used is greater. The cost of materials for each unit in the materials budget is assumed to $1.50. Direct materials are traceable matter used in manufacturing process. The budgeted direct material for product A is $2,99,700 and for product B is $63,180. For both the products, the cost of each unit is assumed at $4.50 and $1.50 per unit for product A and B respectively. The direct labour budget is prepared to calculate the number of labour hours required to produce one unit of a product. The direct labour budget is useful for anticipating the number of employees needed to staff the manufacturing area throughout the budget period. From the appendix below it is seen that the budgeted labour cost is higher in the case of product A, compared to product B. This is due to the difference in sales volume of the two products. The labour hour per unit is assumed at $2 and the cost per labour hour is assumed at $3. Due to the higher sales volume of product A, the direct labour budget of product A is significantly higher than that of product B. Overhead budget shows the assumed cost of all production costs except direct material and direct labor cost. In the case of Steve Rogers Delicacy, overhead budget contains only administrative expense. According to the appendix below an overhead budget is created as a contingent budget, which is calculated at 1% of Administrative expense. The selling expense budget is prepared to estimate the selling expenses that will occur in a given period. From the appendix below, the selling expense budget of Steve Rogers Delicacy depicts expenses, assumed to be incurred over a year. It includes Commission at 2%, which is calculated on budgeted units of sales. This also includes Freight Charges of $200, Advertising of $1,000 and Other Selling Expenses of $500 per month. The administrative budget is prepared to identify the cost of running an operation that is not bound to producing a product or service. The budget provides the management with the power to exercise control over the day to day activities of the business. According to Mervis, 2016, the salaries of the administrative personnel are assumed at $10000 per month and Telecommunication, Repair and Maintenance, Supplies and Other Administrative Expenses are assumed at $150, $120, $500, $300 respectively on a monthly basis. The administrative expense budget for the year 2016 is calculated at $1,32,840 for both the products A and B. Administrative expense budget will also help Steve Rogers Delicacy to make prompt and precise decisions regarding the operation and smooth running of the business. The appendices appended below do not show the projected budget for 2nd and 3rd years. Income Statement shows such calculation. However, the assumption is that the all kind of expenses have increased by 10%, be it fixed cost and be it variable cost. Income statement: The income statement is a report that shows income, expense during a specific period and resulting profit or loss during the same period. It is the first financial statement prepared during the accounting cycle. From the appendix given below, it is noticed that Steve Roger's Delicacy has earned a profit of $26,224 (2%). The sustainability, viability and growth of a company depend on its profit earning capability. Steve Rogers Delicacy income state depicts a sound health of the business. Earning a profit results in investors interest in the business. Earning investors interest is beneficial for the business as it will help the business to expand and grow both financially and geographically by acquiring additional funds and by setting up new branches in new locations. This, in turn, will help the business to increase its goodwill, which ultimately will increase the market share of Steve Roger's Delicacy in the food industry. It has been assumed that the growth in revenue for 2nd year a nd 3rd year is 10% each. Consequently the revenue for 2nd year would be around $1,342,440 whereas the same was around $1,220,400 and the same for 3rd year would be around 1,476,684. It has also been assumed that the expenses will also grow at a steady rate of 10%, same as revenue. Therefore, the revised expenses for 2nd and 3rd year will stand at $13,13,594 and $14,44,953 respectively. Initially, the first years total expenses were $11,94,176. It may be inferred that due to the increase of expenses by 10% each year, profit has also increased by 10% each year. Weighted Average Contribution Margin Weighted Average Contribution Margin (WACM) is the average amounts that group of products contribute to paying the fixed cost of a business. WACMs main weakness is that the projections based on the average margin incorporate the assumption that the product mix sales and margin will apply in the future. The weighted average contribution margin is useful for calculating the number of units that must be sold to cover its fixed expenses. The analysis is also known as cost-volume-profit analysis. According to the Emokaro (2014) the above content can be explained by the appendix below, where the sales price per unit is taken $12 and $10 for product A and product B respectively. The contribution margin is calculated at $1.26 ($12-$10.74) for product A and $2.30 ($10-$7.70) for product B. From the above computation the proportion in product mix is calculated at 65% for product A and 35% for product B. Therefore the weighted average contribution margin of product A and product B is $1.66 (con tribution/unit multiplied by proportion in product mix of product A plus contribution/unit multiplied by proportion in product mix of product B). Contribution Margin Ratio Contribution Margin Ratio (CMR) The contribution margin measures how proficiently a company can manufacture products and maintain low levels of variable cost. It is also known as managerial ratio, as management incorporates this calculation to improve internal procedures in the production process. Contribution margin ratio is calculated by dividing contribution margin per unit by sales price per unit, this is done to analyze weather product A or product B is more profitable for the business. According to the appendix given below the contribution margin ratio of product A is 10.5% and product B is 23%. It means that production of product B will incur more profit compared to product A. Although the sales price per unit of product A is more ($12) than product B ($10), product A contributes less in the business, so it is advisable to stop the production of product A and increase the production of product B to increase profit. Here it may be noted that the Contribution Margin Ratio will increase by 10% each year in 2nd and 3rd year. This is because of the fact that the revenue has also increased by 10% and all the expenses including variable expenses have also increased by 10%. Therefore, the contribution per unit will also stand as before. However, the total sales will increase by 10% in terms of units. Revised proportion in product mix will remain same as before, both in terms of amount and units. Consequently revised WACM will increase by 10% and the same will stand at around 1.83 in 2nd year and at around 2.01 in 3rd year. Sales volume, breakeven points Sales volume in units with respect to breakeven point is the amount of product that needs to be produced or sold to cover total cost of production. In other words breakeven point in units refers to a no-profit no-loss situation. The above statement can also be explained by karimi Torghabeh et al (2014) as the total revenue generated is sufficient to cover the cost of production to arrive at a no-profit no-loss condition. Therefore, from the appendix below the break even sales volume in units are 92,950. This includes 56,940 units of Barbecued Shrimp and 36,011 units of Sausage Rolls. In other words, the break even sales would be $683,277 for Barbecued Shrimp and $360,106 of Sausage Rolls. Since the total sales for the first year is 1,08,720 consisting of 66,600 units of Barbecued Shrimp and 42,120 units of Sausage Rolls, it may be inferred that the break even volume will be achieved within the 1st year. Hence, the concept of break even point may not become relevant in subsequent year s. The breakeven sales volume can be formulated by dividing contribution in units by total fixed cost. It means if Steve Rogers produces one unit more than the breakeven sales volume unit, the company will gain a profit and if the company produces a unit less than the breakeven sales volume it will earn a loss. The breakeven point refers to the revenue needed to cover a companys total fixed and variable expenses during a specific time period. The breakeven is based on assumption that change in expenses of the company is related to change in its revenue. The breakeven point in sales dollars is formulated as fixed expenses divided by contribution margin ratio. Thus from the above explanation it can be incurred that if Steve Rogers Delicacy produces 56,940 units of Barbecued Shrimp (A) and 36,011 units of Sausage Rolls (B), the business will face a no-gain no-loss situation. In other words if the company sells a total of $10,43,383 it will neither gain a profit nor a loss. The operating leverage and safety margin The operating leverage is a measurement of degree to which a firm incurs fixed and variable cost says Hart Tzokas (2000). The company that makes sales with a high gross margin and few fixed and variable cost has much leverage. The operating leverage is used for calculating a companys breakeven point, substantially affecting profits by changing the pricing structure. From the appendix below degree of operating leverage (DOL) is calculated by multiplying total contribution of product A with net profit of product A. Therefore the operating leverage of Steve Rogers Delicacy is calculated at 6.89%. It means with one percent change in sales, the profit of Steve Rogers will change by 6.89%. In other words a degree of change in sales will affect the profit margin by the calculated degree of operating leverage. Since the total contribution and net profit also increase by same proportion i.e. 10%, the DOL ratio remains same. Business concerns are separate legal entities that solely focus on profitability. Businesses also suffer from risks and contingent liabilities, which may occur at any point of the businesses life span. Di Maio et al. (2016) states that for these unforeseen contingencies, any business concern that is at its inception will have to keep a safety margin for its financial safety and soundness. The concept of safety margin arises due to risks in the market that can hamper the smooth running of the business and its future viability (Sherry et al. 2013). According to the appendix below, a safety margin of $1,77,017 is calculated by subtracting revenue at breakeven point from total revenue of Steve Rogers Delicacy. In other words the safety margin is the excess of revenue earned over the breakeven point sales volume. (Ofileanu, Bumbescu 2014) states that safety margin is a mandatory concept in business concerns. The margin of safety (MOS) increases in the 2nd and 3rd year. The MOS will be $2 99,057 in the 2nd year and $433,301 in the 3rd year. Critical Evaluation: The food industry is one of the most flourishing businesses nowadays. Jingjing, (2015) states that people love to eat, and love to surprise their taste buds. Steve Rogers Delicacy should try different mediums in selling their products. Mobile food vehicles are one of the most efficient, easy to reach, easy to handle modes of selling food. They reach a variety of customers in a short period with low operating cost and overhead expenses. According to (Love PhD, 2012), the expansion of business in different areas may prove profitable, keeping in mind customers taste and preferences. Steve Roger's Delicacy should expand its business through online services, catering to customers who like to have their food delivered to their doorsteps. The amount of revenue a business earns depends on few factors that are, the location the business where it is settled, customer taste and preferences and availability of cheap labour. The main objective of an organisation is to earn a profit. The business should perform a market survey, keeping in mind the concept of profitability, to get an idea of customer taste and preferences to a get an estimate about the forecasted profitability and sustainability of the business. According to (Wang et al. 2010) Steve Rogers Delicacy should incorporate canter van services in their business to reach customers beyond their vicinity. Steve Rogers should also include more variety of food items in their menu, to serve to a larger customer base. The increase in customer base will increase the sales volume, resulting in increased profitability. To ensure the continuous and smooth running of Steve Roger's Delicacy the business should take into consideration few factors. The business outlet (restaurant) should be presentable visually to attract more customers. The quality of food should meet high standards, keeping in mind the price quoted. The price should not be too high, as it, may discourage customers, owing to the high priced menu. The infrastructure of the restaurant should be eye-catching so as to attract more customers. The (Henrekson, 2014) states that for any business to flourish, it has to look presentable, as the first impression is the last impression. The quality of food is important, as customer tastes and preferences vary, the profitability and sustainability of the business will depend on the quality of food prepared. Also, the employee must be well dressed and well mannered, so as to cater to a variety of customers. Decision making is a daily activity for any business organisation. The process of decision is a habit and a process as well. The profit or loss of a business depends on effective and successful decision making. According to the (Lusardi, 2012), the following are important steps in decision making process: Identify the purpose of decision making Gathering information Judging the alternatives Analyse different choices Evaluation of different alternatives Selection of best alternative Execution of decision Result evaluation The key results that would impact the future decision-making of Steve Rogers Delicacy are Customer feedback from canter van service Feedback from hospitality Customer's foot fall Quality of food The variety of dishes preferred by customers. Ray, (2008) states that the feedback from customers with regards to canter van service is vital. If the feedback is negative the canter van service will be stopped, and an alternative will be decided, and if the customer feedback is positive, the service will expand to different areas. The customer is the most important factor of any business. Catering to the customers' needs, tastes and preferences are vital. Proper service to the customers earns loyalty and increase the customer base further; poor service to the client will hamper the restaurants business, and as a result may decrease sales and customer support. Management should decide the proper and efficient way to provide proper hospitality, so it may customer footfall ultimately benefiting the business. Customer footfall depends on Steve Rogers Delicacys marketability, presentation and hospitality and food quality. Managements decision-making process should include these four factors so as to increase the businesses viability and profitability. The main asset of a restaurant is its quality of food stated by Santosuosso, (2014). If customers like the quality of food of Steve Rogers Delicacy, the management may decide to increase the quality further so as to attract more customers. Customers taste, and preferences vary widely. Deciding the right items on a menu is an important task. Too many varieties on the menu will increase the cost of sales. So deciding the right variety of food items on the menu is important, keeping in mind the location where the restaurant is situated and the type of customers that come to the restaurant. According to the Kampf et al (2016) Steve Rogers Delicacy has shown promise of profitability, growth and stability by earning a profit margin of 15% in the FY 2016. The investors who are interested in investing in Steve Rogers Delicacy should take into consideration the proposed product mix application into their decision making process. From the appendix below it is seen that product B contributes 25% in total sales compared to product A, which contributes 10.5% to the business. Thus from the calculation below it can be incurred that the production of product B (Sausage Rolls) will prove to be more profitable for the business. From the weighted average contribution margin it can be stated that if the company produce 108720 units of product B by sacrificing product A, the company will earn $69264 more profit. Thus the product mix table depicts that if the company the company computes the WACM to its decision making process, it will have a profitable and a stable future. The (Kane, 20 13), states that though the price per unit of product A is more than product B, product B provides more contribution to the business than product A. So it can be stated that Sausage roll (B) is a more contributing product earning higher profit. In case of subsequent years also, respective profit figures have been calculated. Net profit for the 2nd year stands at $ 105,036 in the proposed situation and $ 115,540 in the 3rd year in the similar context. Conclusion: From the above case study it can be incurred that the decision making process of the management is justified by including the balanced scorecard approach and the triple bottom line initiatives into the businesses projection of profitability and viability. The management has used various methods to come to a sound decision for the proposed investors. The weighted average contribution margin and contribution margin ratio has helped Steve Rogers Delicacy decide which product will be profitable for the business. The breakeven point has helped the business to calculate the safety margin required. Therefore, it can be concluded that the culmination of the calculations in the case study states that product B (Sausage Roll) is more profitable to produce. The investors should look into this factor before investing, as favorable product mix results in increased profitability and sustainability in the long run. References: Barter, N. (2015). W(h)ither ecology? 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