FreeAir Skate Pty Ltd - Preparation of Income Statement - Case Study Example

List of Tables 1.0 Introduction…………………………………………………………………………2 2.0 Role of A Management Accountant..........................................................................2 3.0 Preparation of Income Statement and Statement And Schedule of Cost of Goods Manufactured........................................................4 3.1 Purpose of Income Statement....................................................................................4 3.2 Statement and Schedule of Cost of Goods Manufactured.........................................4 4.0 Mixed Expenses........................................................................................................6 5.0 ABC Suggestions......................................................................................................6 6.0 Conclusion................................................................................................................7 References......................................................................................................................8 Appendix........................................................................................................................9 1.0 Introduction FreeAir Skate Pty Ltd is a firm founded by John Eustace with 1 year operations. It is engaged in the manufacture of innovative and stylish skateboards. The firm’s immediate production base is situated in Malaga, Western Australia. Subsequently, it has numerous stores positioned in Innaloo, which is about 16km away from the manufacturing plant. Presently, the firm manufactures a total of three distinctive skateboards that include; SnowSkate, SurfSkate and DirtSkate, which are focused to imitate the feeling of snowboarding, surfing and off-roading respectively. The fundamental focus of this report paper rests with identifying the role of a management accountant in adding value to activities of the firm, preparation and expounding on income statement and, also schedule of costs of goods manufactured, establish the expenses as well as develop a cost formula for each of the mixed expense. Consequently, the report puts up a discussion on the purpose of ABC costing system and expounding on whether the costing system should be introduced into the firm’s operations. 2.0 Role of A Management Accountant The role of management accountants in a given firm’s operations has changed a lot from one of a passive prepares of financial information to a rather more proactive role that involves intensive active participation in daily decision making as well as a subsequent focus on a wider array of information that far surpasses the financial obligation (Clinton, and White, 2012). FrreAir can enjoy immense levels of value by adopting management accountants’ expertise. They portray a wide array of knowledge in regards to the formulation and implementation of new standard costing systems and tools. These tools might help the firm to improve on its underlying cost information with formulation of effective decision making support systems in order to prioritise the level of costs and operations. Notably, the firm might use the expertise portrayed by management accountants to prioritise cost reduction and ensure there is imminent driving efficiency mechanisms are set in place (Clinton, and White, 2012. Management accountants help to generate a cost structure and formula that is deemed relevant and actionable in making effective future decisions (Clinton, and White, 2012. In order to reduce costs incurred by the firm, it will be a crucial factor to employ the services of a management accountant to come up with streamlined processess as well as improve productivity mechanisms. Certainly, the firm can benefit from securing a management accountant because with the recent economic downturn, these accountants can help to generate a greater demand for more accurate and appropriate cost reduction (Paulsson, 2012). In fact, management accountants have made sure to meet the needs of a company maintaining an accurate and transparent accounting data in order to protect its operations from the negative effects that emanate from the ever-changing economic environments (Clinton, and White, 2012. Significantly, since most firms’ have continued to focus their activities and operations elsewhere, it has been noted that, without the knowledge portrayed by management accountants, they have remained stagnant to proceed with further cost reduction strategies or rather more useful cost management information. Thus, it can be ascertained that management accountants are indeed valuable strategic partners who are fairly positioned to assist a company like FreeAir Skate Pty Ltd reduce its existing costs structures and thereafter, prevent possible future economic downturns. They should be mostly involved in the operations of a firm because they help ascertain their immediate driving efficiencies, which develops to effective decision making process. 3.0 Preparation of Income Statement and Statement and Schedule of Cost of Goods Manufactured. 3.1 Purpose of Income Statement The sole purpose of a company’s income statement rests with showcasing to relevant stakeholders including management team, potential investors as well as existing shareholders whether a firm has generated or lost money as at the end of the financial period. Subsequently, it is a financial statement prepared by managers of a firm to measure its immediate financial performance over a specified financial period (ldiko Orbán, 2014). It is crucial to note that the financial performance of a given firm is established through the evaluation of its summary of the manner for which it incurs its expenses and from where revenues emanate through both operating and non-operating based activities. Most importantly, the income statement helps to portray the net profit or loss that has been reported over a certain period of accounting time, which in most cases extends in fiscal quarters or years. The section within the income statement that conforms to the operating items is deemed to be of significant importance to investors as well as market analysts since the portion presents substantial level of information related to revenues and expenses that emanate from direct business operations (ldiko Orbán, 2014). Notwithstanding, the non-operating items portion presents both the levels of revenues and expenses informational data relating to activities that are not linked directly to a firm’s regular operations. 3.2 Statement and Schedule of Cost of Goods Manufactured Though companies are not under the obligation to prepare and disclose this statement, a company prepares it in order to compute the immediate cost incurred while generating products for a given period of time. In essence, the cost of goods manufactured amount is usually transferred to the finished goods account section in the period for which its occurs and subsequently, it is used in the calculation of cost of goods sold in yet another already discussed financial statement; the income statement (Schroeder and Rowbottom, 2013). It is crucial to comprehend the fact that the cost of goods manufactured schedule will always report the overall manufacturing already incurred costs for a period of time that there were added to work-in process and, alters the aforementioned incurred costs for the subsequent changes emanating from the work-in process inventory account as a way of calculating the costs attributed to manufactured products. Markedly, the statement of costs of goods manufactured portrays the overall costs of products that have already been offset in the course of the existing period and thereby, transferred out of work in process into finished inventories. Intensive manufacturing companies will always prepare a distinctively separate cost of goods manufactured statement for efficient management decision making processess (Schroeder and Rowbottom, 2013). In fact, the managers of a company will always the results of the statement on internal basis in generating and controlling possible manufacturing costs. The statement should be prepared on a monthly or quarterly basis since it is needed for effective monitoring of production costs and allowing the management team an easier allowance to effect necessary changes in the production processess in case they are needed (Schroeder and Rowbottom, 2013). Subsequently, the statement might be adopted by a company in order to summarise the existing level of manufacturing costs that in constant flow into and out of the factory work sections. 4.0 Mixed Expenses The sole mixed expense incurred by the company is the sales salaries and commissions. This is attributed to the fact that employees will earn a sales salary, which is a fixed costs in itself and commissions for each sales made, which represents the variable component. It is important to note that mixed expense are composed of both fixed and variable costs all intertwined within a single cost mode (Murdoch and Krause, 2012). Fixed costs are constant and are not affected by the changes in the activities and operations of a firm while the variable components are always subject to possible alterations with the ever-changing conditions of operations. The cost formula for a mixed cost is represented by y=a + bx, where y represents the overall costs incurred, a, is the fixed costs while b, is the variable rate per each unit of activities involved and x, is the number of units (Murdoch and Krause, 2012). Therefore, the cost formula for the above mixed expense is 350,000= a + bx, where a is the sales salary , b is the variable rate paid as commissions and x is the total number of employees of the company involved with sales of products. 5.0 ABC Suggestions It will be more appropriate for FreeAir Skate Pty Ltd to employ activity-based costing technique because it facilitates the presentation and disclosure of volumes as well as the types of activity involved in the course of production process hence ensuring quality of cost analysis (Charaf and Fath-Allah Rahmouni, 2014). Basing my argument on the documentation provided as above, it can be fairly ascertained that the company’s has been engaged in production of customised and top notch skating products hence it is bound to enjoy benefits associated with high-level supervision of costs related to ABC model of costing. The company can go ahead and introduce the costing system because it has already sustained and identified costs and related activities of generating the goods at hand. 6.0 Conclusion From the discussion above, it can be noted that FreeAir Skate Pty Ltd needs a management accountant who plays a greater role in ensuring cost reduction as well as identifying its driving efficiencies. It has also been noted that both the income statement and statement of goods manufactured play a greater role in ensuring that management team make effective decisions in future that promote quality analysis of product costs. In order to ensure that the firm operates on fairly identified operational environment, it has been ascertained that it should introduce ABC costing systems in order to differentiate between volume as well as activities related to producing of the customised skates. References Clinton, B. Douglas, and Larry R. White. 2012. "The Role of the Management Accountant: 2003-2012." Management Accounting Quarterly 14, no. 1: 40-74. Charaf, Karim, and Ahmed Fath-Allah Rahmouni. 2014. "Using importance performance analysis to evaluate the satisfaction of Activity-Based Costing adopters." Accounting & Management Information Systems / Contabilitate Si Informatica De Gestiune 13, no. 4: 665-685. Paulsson, Gert. 2012. "The Role of Management Accountants in New Public Management." Financial Accountability & Management 28, no. 4: 378-394. Murdoch, Brock, and Paul Krause. 2012. "Regression and Mixed Overhead Cost Variances." Feature Edition 2012, no. 3: 35-44. Schroeder, Marek, and Nick Rowbottom. 2013. "A Kantian Analysis of Financial Accounting." Journal of Theoretical Accounting Research 8, no. 2: 38-78. Tamás DékánI ldiko Orbán Ms. 2014. "Role and Significance of Statement of Other Comprehensive Income– In Respect Of Reporting Companies' Performance." Annals of the University Of Oradea, Economic Science Series 23, no. 1: 649-658 Appendix FreeAir Skate Pty Ltd Income Statement $ $ Revenues 3,500,000 Cost of Goods Sold (8,530,000) Gross Profit (5,030,000) Less Operating Expenses: Depreciation- plant and equipment 90,000 Retail store equipment 55,000 Marketing, distribution and customer service costs 190,000 Sales salaries and commissions 350,000 Plants supplies used 60,000 Property taxes on plant 10,000 Council rates for retail store 3,000 (758,000) Net loss -5,788,000 FreeAir Skate Pty Ltd Statement and Schedule of Cost of Goods Manufactured Direct Materials: Beginning-Jan 1, 2014 300,000 Plus: Direct Materials purchased 800,000 Raw materials available 1,100,000 Less: Ending Direct Materials (50,000) Cost of direct raw materials used 1,050,000 Direct Manufacturing Labour 400,000 Factory Overheads: Indirect manufacturing labour 200,000 Plant utilities 50,000 Retail store utilities 20,000 Miscellaneous manufacturing overhead 100,000 Miscellaneous retail store overhead 70,000 370,000 Total manufacturing costs 1,820,000 Plus: beginning work in process 100,000 Total work in process during the year 1,920,000 Less: ending work in process (20,000) Cost of goods manufactured 1,900,000 Plus: beginning finished goods 400,000 Machinery purchase 6,350,000 Finished goods available for sale 8,650,000 Less: ending finished goods (120,000) Cost of goods sold 8,530,000 Read More