Manufacturing of Business Product

Question: Discuss about the Report for Manufacturing of Business Product. Answer: 1. Fixed manufacturing overheads refer to those costs which are indirect in nature but related to the manufacturing of the product. These are typically fixed in nature and hence do not vary as per the volume of the output produced. In the event that output is lesser, then the fixed manufacturing cost allocated to each item would increase. However, since these are essentially fixed, hence they are not related to the production activity actually been undertaken (Drury, 2008). There are essentially two methods to compute the income statement i.e. Absorption costing and variable costing. In case of absorption costing, the fixed manufacturing overheads are included in the product cost and not the period cost. Hence, the fixed manufacturing overheads are computed by dividing the total fixed manufacturing overheads by the total production level of the product. Thus, the contribution margin is computed by deduction of fixed manufacturing overheads. In case the production is higher than the demand, then this method ensures that some of the fixed manufacturing overheads is transferred to the inventory cost and deferred to the next period and hence provide a boost to the profits of the company (Bhimani et. al., 2008). In case of variable costing, the fixed manufacturing overheads are not included in the product cost but as period cost. As a result, the per unit fixed manufacturing overheads does not need to be computed. Also, the complete fixed manufacturing overheads would be accounted for in the income statement and no component would be deferred to the future through the medium of inventories. Hence, typically this would lead to a lower profit figure as compared with the absorption costing since all the fixed manufacturing overheads would be accounted for in the income statement (Seal, Garrison Noreen, 2012). Maria indeed has vested interest in the given case which is why she is insisting on overproducing the product so as to cause a huge inventory and by adhering to the absorption costing, she would shift a host of the fixed manufacturing costs in the future through huge inventory. Clearly, this is incorrect and hence the absorption costing must not be used for external reporting (Petty et. al., 2015). External Reporting With regards to reporting to external stakeholders, it is recommended that the variable costing would be the preferred method as this ensures that an accurate picture is presented to the shareholders with regards to the performance of the company and the various costs already incurred (Parrino Kidwell, 2011). Internal Reporting With regards to internal reporting the firm has got a choice between absorption costing and variable costing. While taking decisions regarding pricing, the absorption costing is the most suitable since it takes into consideration all the costs actually involved in production and hence lead to better accuracy with regards to costing of an individual product. However, in cases of evaluating an external contracts in case of idle demands, it is recommended that the company deploys the variable costing into account as the fixed manufacturing cost is not an incremental cost and hence quote to external parties should not include this (Bhimani et. al., 2008). 2. It is apparent that there are three market segments of Cinto namely General Supermarket, Pharmacy Chains and Pharmacist owned single stores. Gross margin = (Gross Profit/Total Revenue) *100 Gross margin (General Supermarket) = (108000/3708000)*100 = 2.91% Gross margin (Pharmacy Chains) = (150000/3150000)*100 = 4.76% Gross margin (Pharmacist owned single stores) = (180000/1980000)*100 = 9.09% The cost per activity for the given activities is summarised in the table below (Brigham Ehrhardt, 2013). ACTIVITY LEVEL Activity General Supermarket Pharmacy Chains Pharmacist owned single store Total activity Total cost ($) Cost driver rates ($) Orders Processed (Number) 140 360 1500 2000 80000 40 Line items orders (Number) 1960 4320 15000 21280 63840 3 Store Deliveries made (Number) 120 360 1000 1480 71000 47.97 Cartons shipped to stores (Number) 36000 24000 16000 76000 76000 1 Shelf Stocking (Hours) 360 180 100 640 10240 16 Cost driver rates = Total cost/Total activity level The allocation of the other operating costs based on the above cost driver rates is shown below (Drury, 2008). Activity General Supermarket Cost ($) Pharmacy Chains Cost ($) Pharmacist owned single store Cost ($) Orders Processed (Number) 5600 14400 60000 Line items orders (Number) 5880 12960 45000 Store Deliveries made (Number) 5,756.76 17,270.27 47,972.97 Cartons shipped to stores (Number) 36000 24000 16000 Shelf Stocking (Hours) 5760 2880 1600 Total operating costs ($) 58,996.76 71,510.27 170,572.97 Operating Profit (General Supermarket) = 108000 58996.76 = $ 49,003.24 Operating profit as a % of revenue (General Supermarket) = (49,003.24/3708000)*100 = 1.32% Operating Profit (Pharmacy Chains) = 150000 71510.27 = $ 74,489.73 Operating profit as a % of revenue (Pharmacy Chains) = (74,489.73/3150000)*100 = 2.36% Operating Profit (Pharmacist owned single store) = 180000 170572.97= $9,427.03 Operating profit as a % of revenue (Pharmacist owned single store) = (9427.03/1980000) *100 = 0.48% From the above calculations, it is apparent unlike the gross profit margin which is the highest for pharmacist owned single stores, the operating profit margin is the highest for pharmacy chains and lowest for the pharmacist owned single stores. Thus, it is imperative that the overhead costs must be allocated correctly so as to identify the actual profitability of the various segments (Brealey,Myers Allen, 2008). Based on activity based costing, profitability margins are in the following order. Pharmacy chains General Supermarkets Pharmacist owned single stores. 3. The manager of Hair Suite III would be the most effective as he/she is displaying the participative approach of management which enables the team to arrive at a sustainable and mutually agreeable solution. This is because the manager put forward the problem before the stylists and has worked out as a solution which resolves the problem without disturbing their current job timings or quality. In case of Hair Suite 1, the manager follows a authoritative management style where it is recommended that the time per customer would be reduced and also the breaks without having any discussion with the stylists as to whether their work would be adversely impacted by such a schedule. Similarly, in case of Hair Suite II, the manager does not discuss the problem or ask for a feedback on a suggestion but goes and straight away directs that the stylists need to work one hour more on a daily basis (Bhimani et. al., 2008). The stylists would be unhappy with the directive given by managers of Suite I and Suite II. This would be because there has been no discussion with the core problem and the likely solutions but instead a particular solution has been forced upon the stylists without taking their inputs and feasibility of the idea considering the impact of customer quality and stylists performance. If the stylists are unhappy, it may lead to lower productivity from the stylists and also customer satisfaction may be adversely impacted. The motivation levels of stylists may be impacted and hence they can potentially quit the saloon and look for an alternate location. Additionally, there could be increased disputes between the stylists and also the respective managers which would be counter-productive for all the possible stakeholders. In case the stylists are not willing to share their suite, then the potential alternative solutions could be as follows. The appointment timings can be customised especially for regular customers as the time required is typically known. Further, some rationalisation as per the services offered may be done which could accommodate incremental customer atleast on some days. Introduction of the rule that in one month, on one of the holidays, each person would have be serve a half day which could bring in incremental revenue. Providing flexibility to stylists that they should work overtime on some days in the week instead of everyday. The concept of stretch target can be applied in case of manager of Suite 1. This is because now a difficult target of servicing eight customers in the daily shift has been provided to each stylist and they are expected to meet this in order to successfully discharge their obligations (Seal, Garrison Noreen, 2012). This is different from the regular target of serving seven customers in a daily shift. It may be likely that due ot the ongoing nature of the stretch target, the customer service may be adversely impacted and also the stylist may feel fatigued due to a break of only five minutes between the sittings. Thus, it is highly likely that the stretched target given to the stylists cannot be met on a daily basis without compromising the quality and also increasing the potential of burn out on the part of the stylists. 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