Capstone Project: Product Manufacturing

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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… [END OF PREVIEW]

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