Memorandum: Boom Broom Manufacturers
Boom Broom manufacturer is located in South Brisbane. It produces desk and sell the product to state school. Mr. Maison Broom, the owner of the company has hired you as a consultant to prepare a master budget and to provide an advice how to improve the company’s financial performance.
Memorandum
To: Mr. Maison Broom
Date: 13-09-2019
From: XXX
Subject: Recommendation to improve the financial performance of the company
As per request, I have conducted an in-depth analysis of the financial performance of your company. The resultant figures are quite troubling. The company is currently not earning more than 8% of the profit on monthly basis, while its Gross Profit margin is also lower than 25%. This shows that Boom Broom Manufacturing is manufacturing desks at a very high cost. The company is manufacturing the desks at the cost of $80 and more per unit while its selling price is $115 per unit. The main cost is the highest in the cost of direct labor and the Manufacturing overhead costs per unit. The company is incurring way too much cost on its labor and its overhead.
It is therefore recommended to lower the labor costs as a first step. Using the same labor in different shifts or working on increasing the efficiency of the labor so that fewer labor hours are needed for the manufacturing of the units is needed. Furthermore, the company can also work on increasing its sales volume to compensate for the high costs of production or overheads. However, it is for the long-term plan. Initially, it is recommended that your company work on getting lower prices from the labor and lower its overhead costs as well. The depreciation amount is one of the highest costs in the Selling and Admin Expense as well as in the Overhead. It is also suggested to look into the method that has been used for the calculation of this depreciation expense as it is very high.
Furthermore, the company is also incurring a high cost of salaries of the staff as well. This can be looked into as well. It is suggested that your company should work on increasing the efficiency of your employees and the workers and reduce the depreciation expense by changing the method used for the calculation of its expenses. Moreover, Boom Broom should also look into targeting more clients and improving its sales volume.
Regard
Appendix:
| Boom Broom Manufacturing | ||||
| Sales Budget | ||||
| For the Quarter Ending March 31 | ||||
| Jan | Feb | Mar | Total | |
| Units | 20,000 | 30,000 | 35,000 | 85,000 |
| Selling Price | $ 115 | $ 115 | $ 115 | $ 115 |
| Sales | $ 2,300,000 | $ 3,450,000 | $ 4,025,000 | $ 9,775,000 |
| Boom Broom Manufacturing | ||||
| Production Budget | ||||
| For the Quarter Ending March 31 | ||||
| Jan | Feb | Mar | Total | |
| Sales | 20,000 | 30,000 | 35,000 | 85,000 |
| Add: Desired Ending Inventory | 18,000 | 21,000 | 25,200 | 64,200 |
| Total Inventory Needed | 38,000 | 51,000 | 60,200 | 149,200 |
| Less: Beg Inventory | 19,000 | 25,500 | 30,100 | 74,600 |
| Unit to be Produced | 19,000 | 25,500 | 30,100 | 74,600 |
| Boom Broom Manufacturing | ||||||||
| Direct Material Purchase Budget | ||||||||
| For the Quarter Ending March 31 | ||||||||
| January | February | March | Total | |||||
| Wood | Components | Wood | Components | Wood | Components | Wood | Components | |
| Unit to be Produced | 19,000 | 19,000 | 25,500 | 25,500 | 30,100 | 30,100 | 74,600 | 74,600 |
| DM Per Unit | 2 | 6 | 2 | 6 | 2 | 6 | 2 | 6 |
| Production Need | 38,000 | 114,000 | 51,000 | 153,000 | 60,200 | 180,600 | 149,200 | 447,600 |
| Add: Desired End DM | 25,500 | 76,500 | 30,100 | 90,300 | 36,000 | 108,000 | 91,600 | 274,800 |
| Total Material Needed | 63,500 | 190,500 | 81,100 | 243,300 | 96,200 | 288,600 | 240,800 | 722,400 |
| Less: Beg DM | 40,550 | 121,650 | 48,100 | 144,300 | 56,000 | 168,000 | 144,650 | 433,950 |
| Total DM to be Purchased | 22,950 | 68,850 | 33,000 | 99,000 | 40,200 | 120,600 | 96,150 | 288,450 |
| Cost Per Unit | 10 | 5 | 10 | 5 | 10 | 5 | 10 | 5 |
| Total Cost of DM to be Purchased | 229,500 | 344,250 | 330,000 | 495,000 | 402,000 | 603,000 | 961,500 | 1,442,250 |
| Boom Broom Manufacturing | ||||
| Direct Labor Budget | ||||
| For the Quarter Ending March 31 | ||||
| Jan | Feb | Mar | Total | |
| Unit to be Produced | 19,000 | 25,500 | 30,100 | 74,600 |
| DL hours per unit | 3 | 3 | 3 | 3 |
| Total DL hours needed | 57,000 | 76,500 | 90,300 | 223,800 |
| DL cost per hour | $ 14.25 | $ 14.25 | $ 14.25 | $ 14.25 |
| Total DL Cost | 812,250 | 1,090,125 | 1,286,775 | 3,189,150 |
| Boom Broom Manufacturing | ||||
| Overhead Budget | ||||
| For the Quarter Ending March 31 | ||||
| Jan | Feb | Mar | Total | |
| Budgeted DL Hours Required | 57,000 | 76,500 | 90,300 | 223,800 |
| Variable Man Overhead Rate | $ 2.40 | $ 2.40 | $ 2.40 | $ 2.40 |
| Budgeted Variable Overhead | 136800 | 183600 | 216720 | 537120 |
| Budgeted Fixed Overhead | $ 338,000.00 | $ 338,000.00 | $ 338,000.00 | $ 338,000.00 |
| Total Overhead | $ 474,800.00 | $ 521,600.00 | $ 554,720.00 | $ 875,120.00 |
| Boom Broom Manufacturing | ||||
| Selling and Administrative Expenses Budget | ||||
| For the Quarter Ending March 31 | ||||
| Jan | Feb | Mar | Total | |
| Budgeted DL Hours Required | 57,000 | 76,500 | 90,300 | 223,800 |
| Variable S&A Expense Rate | 3.6 | 3.6 | 3.6 | 3.6 |
| Budgeted Variable S&A Expenses | 205,200 | 275,400 | 325,080 | 805,680 |
| Budgeted Fixed S&A Expense | $ 110,000 | $ 110,000 | $ 110,000 | $ 110,000 |
| Total S&A Expense | $ 315,200 | $ 385,400 | $ 435,080 | $ 915,680 |
| Boom Broom Manufacturing | |||
| Ending Finished Goods Inventory Budget | |||
| For the Quarter Ending March 31 | |||
| Jan | Feb | Mar | |
| DM Cost Per Unit | 15 | 15 | 15 |
| DL Cost | $ 42.75 | $ 42.75 | $ 42.75 |
| MOH Cost | 42.69 | 31.81 | 26.95 |
| Total Cost Per Unit | $ 100.44 | $ 89.56 | $ 84.70 |
| Ending Finished Goods Inventory Units | 18,000 | 21,000 | 25,200 |
| Cost Per Unit | $ 100.44 | $ 89.56 | $ 84.70 |
| Ending Finished Goods Inventory | $ 1,808,005 | $ 1,880,797 | $ 2,134,444 |
| Boom Broom Manufacturing | ||||
| Cost of Goods Sold Schedule | ||||
| For the Quarter Ending March 31 | ||||
| Jan | Feb | Mar | Total | |
| Finished Goods Inventory, Jan 1 | 15000 | 18,000 | 21,000 | |
| WIP inventory, Jan 1 | 0 | 0 | 0 | |
| Direct Material Inventory Beg | 162,200 | 192,400 | 224,000 | |
| Purchases | 91,800 | 132,000 | 160,800 | |
| DM available for use | 254,000 | 324,400 | 384,800 | |
| Less Ending DM Inventory | 102,000 | 120,400 | 144,000 | |
| Cost of DM in Production | $ 2,280,000 | $ 3,060,000 | $ 3,612,000 | |
| DL | $ 812,250 | $ 1,090,125 | $ 1,286,775 | |
| MOH | $ 474,800.00 | $ 521,600.00 | $ 554,720.00 | |
| Total Manufacturing Costs | $ 3,567,050 | $ 4,671,725 | $ 5,453,495 | |
| Total WIP during Period | 0 | 0 | 0 | |
| Less Ending WIP | 0 | 0 | 0 | |
| Cost of Goods Manufactured | $ 3,567,050 | $ 4,671,725 | $ 5,453,495 | |
| Less Finished Goods Ending | $ 1,808,005 | $ 1,880,797 | $ 2,134,444 | |
| Cost of Goods Sold | $ 1,759,045 | $ 2,790,928 | $ 3,319,051 | $ 7,869,023 |
| Boom Broom Manufacturing | ||||
| Income Statement | ||||
| For the Quarter Ending March 31 | ||||
| Jan | Feb | Mar | Total | |
| Sales Revenue | $ 2,300,000 | $ 3,450,000 | $ 4,025,000 | $ 9,775,000 |
| Cost of Goods Sold | $ 1,759,045 | $ 2,790,928 | $ 3,319,051 | $ 7,869,023 |
| Gross Profit | $ 540,955 | $ 659,072 | $ 705,949 | $ 1,905,977 |
| Selling and Administrative Expenses | $ 315,200 | $ 385,400 | $ 435,080 | $ 915,680 |
| operating Income | $ 225,755 | $ 273,672 | $ 270,869 | $ 990,297 |
| Tax Expense | $ 56,439 | $ 68,418 | $ 67,717 | $ 247,574 |
| Net Income | $ 169,316 | $ 205,254 | $ 203,152 | $ 742,722 |
| Gross Profit Margin | 23.5% | 19.1% | 17.5% | 19.5% |
| Profit Margin | 7.4% | 5.9% | 5.0% | 7.6% |
| Boom Broom Manufacturing | ||||
| Cash Budget | ||||
| For the Quarter Ending March 31 | ||||
| Jan | Feb | Mar | Total | |
| Opening Bal | 50000 | (1,217,050) | (2,438,775) | |
| Cash inflows | ||||
| Sales Revenue | $ 2,300,000 | $ 3,450,000 | $ 4,025,000 | $ 9,775,000 |
| $ 2,350,000 | $ 2,232,950 | $ 1,586,225 | $ 9,775,000 | |
| Cash Outflows | ||||
| Labor | $ 812,250 | $ 1,090,125 | $ 1,286,775 | $ 3,189,150 |
| Materials | $ 2,280,000 | $ 3,060,000 | $ 3,612,000 | $ 8,952,000 |
| Overheads | $ 474,800 | $ 521,600 | $ 554,720 | $ 1,551,120 |
| $ 3,567,050 | $ 4,671,725 | $ 5,453,495 | $ 13,692,270 | |
| Net Cash flow | $ (1,217,050) | $ (2,438,775) | $ (3,867,270) | $ (3,917,270) |
