Cost accounting of Glendale Pizza
To: The Board of Directors
From: My name
CC: Management
Date: May 21, 2017
Re:Product description, it’s estimated profitability and its budgeted financial statements. An analysis of Glendales pizza shows it’s projected profitability and budgeted financial statements. This is important to the company as it acts as a road map and as a blue print to determine the profitability of the investment. In the production of Glendale Pizza, there are several incurred costs that can be described as Direct and Indirect Material, Direct Labor, Overhead Cost, Selling and General, and Administrative Cost. The profit gotten from this product now depends on the number of these costs and how they are managed. Thus it is important that they are properly managed to maximize profit. In order to determine the profitability, I have drawn the vertical analysis of an income statement using the details given.
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Glendale Pizza |
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|
The Budgeted Income Statement |
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|
30-Dec |
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|
|
Amount |
Vertical Analysis |
|
Sales |
$4,000,000 |
100.00% |
|
Cost of goods sold |
$3,338,146 |
83.45% |
|
Gross margin |
$661,854 |
16.55% |
|
Selling and administrative expenses |
$99,000 |
2.48% |
|
Net operating income |
$562,854 |
14.07% |
|
Interest expense |
($21,600) |
-0.54% |
|
Net income |
$541,254 |
13.53% |
From the vertical analysis, the product will generate a net profit margin of 13.53% for the first year of its production. This is a good return for the company and hence they should go on with the investments unless a further analysis shows different results.
From the income statement, the price of goods sold constitutes the largest costs accounting for 83.45% of the sales. It is important to put measures in place to reduce hence increase the net profit generated.
Thus I am expecting Glendale Pizza to generate high revenues in order to be in line with the high staff cost that it is expected to be incurred in it. On the other hand, it will contribute the least staff cost of $157,500.00. This needs to be investigated in comparison with the revenues expected from it and then the decision can be made to ascertain the reason behind. The management should take note of the increasing staff cost in each year and compare it to the expected revenues to ascertain whether it is justifiable in the organization. The management should get ways of controlling the increasing staff cost to make it optimal.
The management should always keep a look on the trends of the cost and revenue to ensure that it is optimal and in line with its expected future returns in terms of the predicted profits and incomes of the shareholders.
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