Investor Report for Furrfection

Furrfection 1 Investor Report for Furrfection Your Name Report for Furrfection Introduction Furrfection focuses on creating and selling affordable quality pet supplies, especially harnesses, collars, and leashes for all pets. While Furrfection is mainly a manufacturing company, we also aspire to create the most welcoming atmosphere for pets, fur-parents, and other visitors through our products and services. We hope to expand our business and our vision of a welcoming business atmosphere throughout our state within the next five years. Purpose This report explains the current situation of our company. It discusses the management accounting methods we use to determine our strategy and evaluate our financial information. This report also discusses our company's projected sales and our budgets in line with our goal of expanding Furrfection. We hope to convey our determination, vision, and mission through this report in hopes that you will be encouraged to invest in us. Methods and Approach We used the following management accounting methods for our business: identifying costs, job-order costing system, cost-volume-profit analysis, budgeting, and evaluation of variances. These methods are instrumental in determining a business's decisions, such as setting prices, continuing, focusing on, or stopping a product line, forecasting business or product profitability, and longevity. Our mission and vision are to provide a welcoming business atmosphere throughout the state. To achieve this goal, we need to ensure our business stays profitable. Regarding our products, we researched the pet products industry to make sure our products are safe for pets. The American Pet Products Association requires that pet products be labeled appropriately and provides other sources that our company checks from time to time to Report for Furrfection see if we are compliant with pet products industry standards (American Pet Products Association, 2021). We also checked other standards such as the ASTM Standards to ensure our products' safety and quality and the Safety Data Sheet (SDS) and guidance (Cheng, 2019). Our company also recognizes the importance of Corporate Social Responsibility as our business does not only exist to profit but also benefit the community it serves (Kubasek et al., 2020). In line with our vision mission, our company finds it as our duty to protect the environment, and we do so by reducing costs and minimizing harmful emissions to the environment. This becomes our company's guide in making ethical decisions. Regarding our accounting system, standards, and professional conduct, we followed the AICPA's code of ethics. We recognize the importance of the principles of responsibilities, public interest, integrity, objectivity and independence, and due care in our business and seek to abide by these principles. These principles are strictly observed in our financial data. Financial Strategy Costing System There are other costing systems such as process costing systems and activity-based systems, but our company has determined the job order costing system works best for our business. We have three product lines, where each product line requires different materials, labor ability, and hours. The job order costing system assures that each of our products is priced correctly to compensate for the fixed and variable costs, get the maximum contribution margin, and earn a positive operating income. Assuming our company adapts the process costing system, all our products would be priced the same regardless of how much cost was incurred in production. Process job costing is only recommended for manufacturers who produce indistinguishable products from each other, Report for Furrfection such as an oil refinery or an ice-cream manufacturer (Warren & Tayler, 2020). The process costing system is used when the "direct material, direct labor, manufacturing overhead cannot be easily or economically traced to a specific unit" (OpenStax, 2021). With this system, there would be products that would be over or underpriced, and the laborers would not be appropriately compensated. Lastly, activity-based costing is only recommended for manufacturers who use machines. It is defined as "a costing method that assigns indirect costs to activities and the products based on each product's use of activities" (Lumen Learning, 2021). Even though we use industrial sewing machines, we still decided on using a job order costing system as it allocates costs directly to each product line, rather than the use of machine-hours. Selling Prices We decided to choose the following prices to sell our collars, leashes, and harnesses for $28, $30, and $35. We chose these prices as they provide the highest contribution margin possible for each product. We may sell fewer items, which means lesser costs and more emphasis on each product's quality. The table below provides the computation, which shows our chosen sales price per unit, the variable cost per unit, and the expected contribution margin. Contribution Margin Milestone Two - Contribution Margin Analysis COLLARS Sales Price per Unit Variable Cost per Unit Contribution Margin $ 28.00 LEASHES $ 30.00 9.10 $ 18.90 HARNESSES $ 35.00 12.10 $ 17.90 14.60 $ 20.40 Report for Furrfection We determined three prices for each unit of a collar, leash, and harness through our market research and chose the highest price per unit as it gives the most contribution margin. The contribution margin is significant because it helps us cover the fixed costs and provide an operating income (Warren & Tayler, 2020). We determined the variable cost per unit by considering what items are used that changes with the output of our business (Lumen Learning, 2021). With the sales price per unit and variable cost per unit established, we deduct the first to the latter to produce the contribution margin. Target Profits COLLARS LEASHES HARNESSES Sales Price $ 28.00 $ 30.00 $ 35.00 Fixed Costs $ 4,028 $ 4,028 $ 4,202 Contribution Margin Before Rounding Up Break-Even Units (round up) $ $ 18.90 213.14 213.00 $ $ 17.90 225.05 225.00 $ $ 20.40 205.96 206.00 Target Profit Before Rounding Up Break-Even Units (round up) $ $ 300.00 229.01 229.00 $ $ 400.00 247.39 247.00 $ $ 500.00 230.47 230.00 Target Profit Before Rounding Up Break-Even Units (round up) $ $ 500.00 239.59 240.00 $ $ 600.00 258.57 259.00 $ $ 650.00 237.83 238.00 The table above shows our breakeven and required units to reach a target profit. Our company must sell 213 units of collars, 225 units of leashes, and 206 units of harnesses to break Report for Furrfection even. That is only to pay for the variable and fixed costs incurred in making these products and operating the business. Target Profit Before Rounding Up Break-Even Units (round up) $ $ Target Profit Before Rounding Up Break-Even Units (round up) $ $ COLLARS 300.00 229.01 229.00 $ $ 500.00 239.59 240.00 LEASHES 400.00 247.39 247.00 $ $ 600.00 258.57 259.00 HARNESSES 500.00 230.47 230.00 $ $ $ $ 650.00 237.83 238.00 The table above is derived from the previous table. It focuses on the number of units sold for breaking even. For example: to earn $300 for our collar product line, we must sell 229 units of collars. To earn $500 for our collar product line, we must sell 240 units of collars. We selected these target profits to match the fixed and variable costs incurred in making the products and to earn a positive operating income. We divided the total of fixed costs and the target profit by unit margin contribution to solving the breakeven units. We need to know our breakeven points because it helps us decide and earn a profit. Financial Statements Statement of Cost of Goods Sold Milestone Three - Statement of Cost of Goods Sold Beginning Work in Process Inventory 0 Direct Materials: Materials: Beginning Add: Purchases for January Materials available for use Deduct: Ending materials 0 $ 20,000 20,000 4,000 Report for Furrfection Materials Used $ 16,000 Direct Labor 8,493 Overhead 3,765 Total Costs $ 28,258 Deduct: Ending Work in Process Inventory Cost of Goods Sold 0 $ 28,258.33 Our company started in the month, so we have no beginning work in process and ending work in process balance. We added $20,000 and subtracted $16,000 from that, having used 80% of the materials and leaving us with $4,000 available inventory ready to be used for the following operating period. Our records show $8,493.33 incurred for direct labor and $3,765 for overhead costs. We compare these numbers to our budget benchmarks. The total cost incurred for labor for this month is $8,493.33, and it matched the budgeted cost for labor. We identified depreciation on sewing machines ($165/month), rent ($750/month), utilities and insurance ($600/month), scissors, thread, and cording ($1,200), price tags ($250), loan payment ($550/month), and salary to self ($500/month) as overhead costs related to manufacturing. The budgeted total for this month's overhead is $4,015, while the actual overhead cost incurred is only $3,765. The actual overhead cost incurred is less than the budgeted overhead. We identified high-tensile strength nylon webbing, polyester/nylon ribbons, and buckles made of cast hardware as direct material. Without the variable indirect costs, the total cost required to make a collar, leash, and harness is $35.5. Our company bought enough materials to make $20,000 worth of collars, leashes and harnesses but only used $16,000 of the materials. Report for Furrfection From dividing $16,000 to the total cost of $35.5, we estimated that there had been 450 units of collars, leashes, and harnesses made. Income Statement Milestone Three - Income Statement Revenue: Collars Leashes Harnesses Total Revenue: Cost of goods sold Gross profit $ 12,880 10,800 14,000 $ 37,680 28,258 9,422 Total Expenses $ 5,715.00 Net Income/Loss $ 3,706.67 Expenses: General and administrative salaries Depreciation Rent Utilities and insurance Scissors, thread, and cording Loan $ $ $ 2,450 165 750 600 1,200.00 550 We forecasted that we needed to sell 213 units of collars, 225 units of leashes, and 206 units of harnesses to break even in the budgeted benchmarks. However, in the income statement, we earned $3,706.67, meaning we sold more than the required breakeven units. The company did better than expected. Report for Furrfection Variances Milestone Three - Variance Analysis Data for Variance Analysis: Budgeted (Standard) Hours/Qty Budgeted (Standard) Rate Actual Hours/Qty Actual Rate Labor 160 $ 16.00 180 $ 16.50 Materials 400 $ 9.10 460 $ 10.00 At the end of the month, our company found out that the labor and materials spent on manufacturing collars was different from what we estimated. This variance only happened to the collars. Instead of eight hours a day, our collar maker had to work nine hours a day due to the increase for collar demand. The employee also had an increase of $.50, due to the demand. The cost of raw materials to make collars increased to $10. Significance of Variances Variances for Collar Sales Favorable/ Unfavorable Variance Direct Labor Time Variance (Actual Hours - Standard Hours) x Standard Rate $ 320.00 Unfavorable $ 90.00 Unfavorable $ 546.00 Unfavorable Direct Labor Rate Variance (Actual Rate - Standard Rate) x Actual Hours Direct Materials Quantity/Efficiency Variance (Actual Quantity - Standard Quantity) x Standard Price Direct Materials Price Variance Report for Furrfection (Actual Price - Standard Price) x Actual Quantity $ 414.00 Unfavorable The table above is a summary of our variance analysis. All the variances are unfavorable based on the equations. However, this does not mean negatively because we made and sold 60 more collars than we expected. This is also why we had higher costs for labor and material than budgeted. Variances are important to businesses because it helps assist in managing budgets by comparing the actual and the budgeted costs. This evaluation showed us that sometimes, we cannot anticipate sudden price or demand changes. Still, having a budget helped us control and minimize costs.