Prepare the mde manufacturing budget

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The product costs are the direct materials, direct labor, and manufacturing overhead that a manufacturer uses to make its products. Product costs are sometimes known as inventorial costs in some industries. Period costs are not necessarily a part of the actual manufacturing of a product. Period costs are not assigned to products or the cost of any inventory. Period costs can be associated with the business and or administration part of a company.

The implications of the cost-volume-profit analysis for MDE Manufacturing is that the company is doing well with its budgeted costs but not breaking even when looking at the contribution margin ratios. The company is currently breaking even with the amount of units it takes in order to make a profit. The breakeven quantity that MDE Manufacturing requires is 33,211 units to be sold and the company actually sold 50,000. The contribution margin ratio for actual sales 17% and for the budgeted sales is 26%. The contribution margin ratios are actually low. If the fixed costs of MDE Manufacturing does not increase at the same rate as the contribution margin rate, then MDE Manufacturing profits will go up.

MDE Manufacturing can increase its contribution margin by generating higher sales, finding ways to decrease fixed and variable costs, and finding other ways to reduce costs. The fixed costs such as rent however cannot be decrease unless the company plans to move the facility or negotiate cheaper costs. The analysis of MDE manufacturing is that the company shows signs of doing better with the $10,000 profit increase. The company would definitely need an increase of sales in order to show stockholders that the company is doing well. Short-term planning is effective in getting employees to focus on the goals at hand but MDE Manufacturing needs to look at long-term goals with long-term vision.

MDE Manufacturing Budget Analysis

Fixed costs are any cost that do not change with an increase or decrease in the amount of goods or services produced. Fixed costs are normally paid independent of any other business activity. MDE Manufacturing's fixed cost included factory depreciation, factory utilities, factory maintenance and repairs, office rent, advertising, liability insurance, office depreciation, and salaries. Fixed cost per unit can decrease with an increase of production.

Variable costs do indeed change in direct correlation to an organization's level of production. Total variable cost increase with the increase in the amount of units produced and decreases as the amount of units produced decreases. MDE Manufacturing uses less variable costs in its budgeted amounts compared to its actual amounts and this tells us that the cost per unit is lower and less units are produced. 

The flexible budget basically evaluates the performance of MDE Manufacturing. The flexible budgets are normally prepared at the end of the period and give the manufacturer a basis to compare its actual output. Basically comparing apples to apples. MDE manufacturing actual variable cost are consequently higher in every expense across the board. Meaning, MDE Manufacturing management is using far more materials and labor than needed to produce its products. The only favorable variances that MDE manufacturing are showing are in the revenue and variable manufacturing overhead. Other departments are using more than need in labor and materials. 

Long-term budgeting or planning are needed by MDE management. The chief goal of MDE manufacturing is to cut cost and increase production in order to maximize sales and revenue. A properly structured budget can help MDE management with setting goals and help to see where they are actually using unnecessary monies and where they are able to produce money.

Processing Costing vs Activity-Based Costing

Cost allocations systems aid companies in determining the cost of products related to the company's revenue (Traditional, 2016). The most common costing systems implemented by companies are the process or traditional costing system and the activity-based costing system. Process or traditional costing assigns manufacturing overhead based on volume. This is the system that MDE Manufacturing currently uses. This where we see items such as how many direct labor hours are needed to produce a product for MDE Manufacturing. Direct labor hours, direct material hours, and machine hours are what is known as cost drivers (Traditional, 2016). These items directly affect cost. 

When using the process or traditional costing system the assumption is that the volume metric is the driver of the overhead cost. Under the process or traditional costing system manufacturing costs are strictly assigned to products but fail to account for non-traditional costs such as administration costs. Most companies decide to implement the process or traditional costing system because it provides a value to the cost of goods sold. One of the advantages of using the process or traditional costing system is that it falls in line with the requirements of the Generally Accepted Accounting Principles (GAAP), (Traditional, 2016).  Most companies are now becoming aware that the process or traditional costing system is outdated for manufacturing companies that use more computer operated machinery for production. The use of computer operated machinery tends to inappropriately assign cost in the process or traditional costing system, due to items such as direct labor hours not being considered the best cost driver. Most bad management decisions by manufacturing management have been directly related to the use of the process or traditional costing system (Traditional, 2016).

The activity-based costing system typically provides management with a more accurate view of the actual product costs (Traditional, 2016). The activity-based costing system aids manufacturing management in determining every activity associated with producing the company's product and the cost associated.   Cost at that point are assigned to the products of that activity. A greater accuracy of cost associated with the production of a company's products is an advantage of the activity-based costing system. This system would give MDE

Manufacturing management a greater understanding of the overhead that is associated with producing its products and an easier interpretation of the costs associated. He meaning of an activity in manufacturing is any process or procedure that consumes overhead resources. Implementing the activity-based costing system takes five steps. The first step MDE manufacturing management would need to do is recognize which activities are needed to make their products. This would take getting all the necessary departments involved. 

The biggest impact on overhead costs would involve purchasing materials, setting up machines, operations of machines, product assembly, and inspections. The next step would be associating or assigning costs to those activities. The third step would be for MDE management to identify the cost drivers for each activity. When implementing an activity-based costing system, there are questions that need considering. Would management need to consider the resource implications of managing this type system? Would MDE Manufacturing have enough resources to implement this type costing system? The answer to both questions would be yes, MDE Manufacturing does have ample amount of resources to implement this type costing system. The provided results of an activity-based costing system would provide MDE manufacturing the information needed to show increases in profitability. There are unknowns or non-value costs that an activity-based costing system can provide for MDE Manufacturing such as cost of machine testing and machine inspections (Cost Accounting, 2011). Some of the benefits of implementing an activity-based costing system would be more efficient production, better accuracy of cost determination, and effective performance evaluations of individual departments (Cost Accounting, 2011). 

Cost drivers are any factors that can change the cost of an activity (Activity-based, 2011). The activity-based costing system can aid MDE Manufacturing in limiting the number of cost drivers and give a far better measurement of costs than a processing system. The process costing system does not seem to benefit MDE Manufacturing as much as an activity-based costing system would. MDE Manufacturing seems to have a lack of commonality in overhead costs. Continuing improvements to the activity-based costing system will better support MDE Manufacturing and give the management better decision making analyses. 

The use of any cost allocating system does not come with a potential for ethical issues arising. MDE Manufacturing could face potential ethical issues after implementing an activity based costing system. Issues could include management possibly ignoring non-value added activities because these activities were never acknowledged in the past (Cost Accounting, 2011). There is the possibility that activities may be misclassified in order to allocate costs away from lower volume products. Calculations could possibly get distorted by management simply by selecting inappropriate cost drivers. Though there can be a potential for ethical issues by using this type costing system or any type costing system, the ethical dilemmas are essentially the responsibility of management to handle in the proper manner. 

The activity-based costing system would be a more essential choice for MDE manufacturing because of the cost associated with each activity would be highlighted. This gives management the opportunity to make the appropriate choices and changes that can better benefit the company's profitability and reduction of expenses.

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Reference no: EM131148624

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