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Josh Bond

on 7 August 2013

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BlackHeath Manufacturing CO.
Josh Bond
Brianne Daley
Casey Davidson
Dani James
Brian Priebe

Produce a single product called the Great Heath

Who is involved:

Lee High – Cost Accountant
Adelaide Ladywell – File Clerk (fired), rehired as the Bookkeeper/Analyst
Charlton Blackheath – owner
Trafalger Blackheath – son, recent MBA grad
Crofton Brockley - Consultant

Blackheath Manufacturing
Lee High was hired as the new cost accountant
Flawed methods led to decision rules that were not intuitive to selling
Charlton Blackheath trusted Lee’s assumptions
Adelaide is fired for accepting an order below the set price

Current Issues

Trafalger Blackheath is brought on board to take over as owner
Hired a consultant to determine the problems facing the firm
Decision rules created by Lee High are incorrect
Need a budget and control system
Lee High and Charlton Blackheath do not understand finance, budgeting, or manufacturing
Adelaide should be rehired

Current Issued (cont.)

Develop appropriate decision rules for pricing
Evaluation of Adelaide Ladywell’s decision
Preparation of the following budgets:
Production budget
Budget for raw materials purchases
Flexible Expense Budget
Projected Income Statement
Net Income if prepared under the assumption of variable costing
Cash budget
Projected balance sheet
Cash Flow Statement
Discussion points between Adelaide, Crofton and Trafalgar
Analysis of January results


Price can change according to capacity levels
Not operating at capacity, total variable cost/unit becomes the minimum price
Suggested pricing structure
Three levels:
Basic price to be applied to as many transactions as possible - at least $7.00.
If necessary (special customers, special circumstances) - negotiate as much as possible, no lower than $6.25.
All sales “bids” below $6.25 MUST be personally approved by Trafalger or his designee 
Revisit the pricing question again in 6 months and adjust accordingly
Cost accounting should be reviewed several times over the next 6 months to make sure all the data is properly processed to support the new analyses

Appropriate Decision Rules

What did Adelaide do?
Accepted the order of 100 units @ $5.50
Why would she have made this decision?
If not at full capacity, anything over variable cost is acceptable
Lost sales = opportunity cost
Goods already produced

Evaluation of Adelaide’s Decision

Production Budget & Raw-Materials Purchases

Flexible Expense Budget

Projected Income Statement

The net income is the same just the cost structure is different
Separation of variable and fixed costs
Comparison of gross margin and contribution margin
The real change comes from making more accurate decisions
Having better data on which to make assumptions
Aids in determining the bottom line price
Shows the amount of revenue available to pay to fixed costs
Helps determine variable costs

Net Profit Change using Variable Costing

Net Profit Change on the I-S using Variable Costing

Cash Budget

Projected Balance Sheet

Projected Cash Flow Statement

Focus on the decision rules
The importance of considering each financial statement
Variable Cost and Fixed Costs considered
Variable costs – the costs of flexible resources
Fixed costs – costs associated with capacity related resources
Related to planned rather than the actual level of activities
How should variable costs be considered?
In order to make a better decision we would need to know…

Discussion Points between Adelaide, Crofton and Trafalger

January was less than a typical month
Were they off from projection?
Price and efficiency variance

Analysis of January Results

Recommendations for Blackheath Manufacturing

Recommendations (cont.)
Full transcript