This project presents the manufacturing process of the steel product and the paper use the process costing in carrying the production process. Unlike the job costing that identifies costs based on the production of different items, the process costing identifies costs of production across different departments. The budget provides the financial plan that the company will employ in the steel production.
Product Manufacturing
The objective of this paper is to present a strategy to manufacture steel. Manufacturing process involves the transformation of raw materials into finished goods, and a manufacturing process requires the acquisition of direct material, direct labor, manufacturing overhead. The product costs represent the costs used to manufacture the steel from the start to finish. Product costs are the summation of direct labor, direct material, and factory overhead. However, the paper uses the process costing in manufacturing of the steel.
Manufacturing Process of Steel
Steel manufacturing process involves combination of direct materials, direct labor, overhead costs and fixed costs to produce a finished product. A manufacturing process using process costing "involves a continuous flow of raw materials through various processing departments," (Garrison, Noreen, & Brewer, 2012 P2) and the finished product is characterized as homogenous units where each process displays some basic characteristics. Under the process costing, manufacturing of steels involves the following steps:
1. Melt iron ore along the processed limestone and coal/coke, then
2. skim the material and add alloys to adjust for tensile flexibility and strength, and finally
3. Blast the oxygen as well as extrude the material into its finished product, which include sheet steel, I-Beams, coils, etc. The illustration in Fig 1 below presents the steel manufacturing process.
(Shim, & Siegel, 2011).
Fig 1: Steel Manufacturing Process
However, there is a need to incur production costs to manufacturing a product, and both variable and fixed costs are very critical for the manufacturing process. The report presents the budget to be used in the manufacturing of steel.
Budget for the Steel Manufacturing
A budget is a quantitative financial plan for a period. A budget may include planned sales revenues, volumes, costs, expenses, as well asset and liabilities However, the report presents the budget for the manufacturing of steel in the Table 1 that includes the following items:
Estimated sales budget, estimated direct materials budget, estimated direct labors budget, estimated manufacturing overhead budget, estimated selling and administrative expenses and an estimated income statement. (Clinton, Van der Merwe,2006).
Table 1: Budget for the Steel Manufacturing Process
July
August
September
November
Total of First Quarter
Revenue
Sales
$125,869
$155,351
$256,755
$257,881
$795,856
Sales Returns
Sales Discounts
15,008
19,375
21,485
23,718
$79,586
Net Sales
$140,877
$174,726
$278,240
$281,599
$875,442
Cost of Goods Sold
$70,000
$73,000
$82,190
$93,153
$318,343
Gross Profit
$70,877
$101,726
$196,050
$188,447
$557,100
Operating Expenses
Salaries & Wages
$22,552
$26,875
$30,569
$39,382
$119,378
Depreciation Expenses
1,500
1,825
1,955
2,679
$7,959
Office Expenses
1,475
1,494
1,993
2,600
$7,561
Rent Expense
4,500
5,674
6,966
6,736
$23,876
Travel Expenses
1,289
$3,979
Maintenance Expenses
$1,592
Advertising Expenses
1,232
$3,183
Total Operating Expenses
$31,577
$37,758
$43,759
$54,434
$167,528
Income From Operations
$39,300
$63,968
$152,291
$134,013
$389,572
Interest Income (Expense)
(300)
(405)
(471)
(416)
$ (1,592)
Income Before Income Taxes
$39,000
$63,563
$151,819
$133,597
$387,980
Income Tax Expense
2,755
2,788
2,927
3,468
$11,938
Net Income
$36,245
$60,676
$148,893
$130,129
$376,042
Overview of the budget of the first quarter reveals that our company will make the total of $376,062 as the net income despite that the operating expenses increase monthly. Moreover, the company will be able to make net sales of $875,442 at the end of the first quarter and the total cost of goods sold will be $318,343. The company will be able to realize the gross profit a $557,100 at the end of the first quarter.
Classification of Manufacturing, Selling and Administrative Expenses as either Variable or Fixed
Variable Cost s
Fixed Costs
General and administrative
Salaries & Wages
$119,378
Depreciation Expenses
7,959
Office Expenses
7,561
Rent Expense
23,876
Travel Expenses
3,979
Maintenance Expenses
1,592
Advertising Expenses
3,183
Total Fixed Costs
$167,528
Direct Material
$115,278
Direct Labor
125,369
Overhead Coat
77,696
Total Variable Costs
$318,343
A contribution margin is an income statement account where all variable costs are deducted from sales to arrive at contribution margins. On the other hand, all fixed costs are deducted from contribution margin. The contribution margin for the steel production is as follows:
Contribution Margin Income
Total
Sales
$795,856
Less: Variable Expenses
$318,343
Contribution Margin
$487,513
Less: Fixed Expenses
$167,528
Net Operating Profit
319,985
Determination of Breakeven Point in Units and Dollars
The formula to calculate the breakeven point is as follows:
Break-even point in units = "Fixed Expenses/Price - Variable Expenses"
Break-Even Point in unit= $167,528/35- $12.35=4774 units
Break-Even Point in Dollars is presented as follow:
To calculate the break-even point in dollars, it is critical to calculate the contribution margin ratio.
Break-even point in Dollars
Revenue
$795,856
Variable expenses
-$318,343
Contribution Margin
$477,513
Contribution Margin Ratio = (Contribution Margin + Revenue) x 100
Contribution Margin Ratio= (477,513 + 795,856) x 100
Contribution Margin Ratio = 59.9%
Thus, the Break-even point in dollars is as follows:
Break-Even Point in $= Total Fixed Expenses + Contribution Margin Ratio
Break-Even Point in Dollars= $167,128 + 59.9%.
Break-Even Point in Dollars =$279,011.
To determine the number of units to sell to make profits of $5,000 a month. The calculation is as follows:
Total Cost per Unit =$12.35
Sale Price per Unit =$35
Number of units to make profits of $5,000
Total revenue Per Unit =$35-12.35= $22.35
=$22.35 x223.71
=$5,000.
Thus, the company will need to sell 224 units of steel a month to make $5,000 profits and earn $10,606 ($47.35x 224) revenue to make $5,000 a month.
Total Cost per Equivalent Unit
The cost of production provides comprehensive information on the material, labor and overhead incurred in the production of steel. Typically, Melting department handles the raw materials, and Skim/Alloy department handles wages payable while Mold/Extrude department is handling factory overhead. The Table 2 reveals total units of iron ore needed in the production of steel.
Table 2: Units Reconciliation
Quantity Schedule
Beginning of work in progress
300,000
Start into Production
600,000
Total Units for Production
900,000
Transfer to Alloy/Skim
650,000
Ending work in process
250,000
Total Units Reconciled
900,000
The company will need 300,000 tons of iron ore processed in the Melting Department and additional 600,000 tons were introduced into the melting vats. However, in the production process, the 900,00 units will be reconciled and 650,000 units will transferred into Skim/Alloy Department, while 250,000 tons still in process.
Table 3: Units Reconciliation
Quantity Schedule
Beginning of work in progress
300,000
Start into Production
600,000
Total Units for Production
900,000
Equivalent Units Calculation
Direct Material
Direct Labor
Factory Overhead
Transfer to Alloy/Skim
650,000
650,000
650,000
650,000
Ending work in process
250,000
125,000
100,000
100,000
Total Units Reconciled
900,000
775,000
750,000
750,000
Using the weighted-average costing method as being revealed in Table 2, the 650,000 units are used as direct material, direct labor and factory overhead. In the end of the work process, 50% (100,000 equivalent units) of the material are used to complete the process while 40% (100,000 equivalent units) of conversion are used. Meanwhile, the cost per equivalent units is presented below:
As being revealed in Table 4, the cost equivalent unit combines costs from beginning work in process, which is equivalent to $2,122,500, and the current period production is $7,365,000 and is divided by the equivalent units. The individual cost factor is combined to identify overall cost per equivalent unit and conversion cost.
Table 4: Cost per Equivalent Units
Conversion
Total Costs
Direct Material
Direct Labor
Factory Overhead
Beginning of work in progress
$2,122,500
$1,620,000
$337,500
$165,000
Start into Production
7,365,000
5,355,000
1,350,000
660,000
Total Costs
$9,487,500
$6,975,000
1,687,500
$852,000
Divided by Equivalent Units
+ 775,000
+ 750,000
+ 750,000
Cost per Equivalent Unit
$9.00
$2.25
$1.10
Total Cost per Equivalent Unit
$12.35
Identify Trends and Competition
Based on the total variable costs and fixed costs, the company will need to sale approximately 224 units of steel to make the profits of $5,000 monthly. The steel industry has matured and experienced a slow growth. However, there are changes in customer tastes, which influence steel demand. Moreover, the new technology is increasingly influencing the production of steel and many companies are gaining competitive edge using the latest technology in the steel manufacturing. Moreover, the cost cutting is another trends happening within the industry because organizations are increasingly source for high quality materials at lower costs to produce at low costs thereby offering the product at low prices in the market. More importantly, many steel companies have taken the advantages of internet technology to offer their products online. Using the internet method to offer products to consumers, many companies have been able to offer their products internationally.
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