Rodolfo can use budgets and performance report in determining whether to start manufacture of his product using Hi-Tech or concentrating as a broker or continuing with the current production method i.e. budgets and performance reports can be used to eliminate unprofitable segments. This will be done through comparing the profitability generated by different market segment.
Through adopting a hi-tech method of production Rodolfo can be able to increase his net income from 46,157 to 213,318. If he acts as a broker of multinational firm in Norway he will increase his income to$65,141. In comparing the net income among the three segments Rodolfo would be better of using the hi-tech method of production as this generates the highest profit.
Performance reports and the budgets can also be used in deciding whether to sell a product or process it further. Rodolfo has the option of selling frame-retardant in the market or processing it further to form a coating. The marginal cost (direct cost) of flame-retardant is 10 while the market price of flame-retardant is also 10 so Rodolfo would not make any gain in selling the intermediate product(flame-retardant) and should proceed to produce coating(finished product).
Accounting reports can also be used in make or buy decision. According to production data available the marginal cost of producing a liter of coating is 25 while an alternative coating can be bought at 27.50.
This indicates that the company would be better of producing it own coating rather than buying and this will result in a net gain of 2.50. In addition the plant capacity is 465 liters of coating while the annual requirement is 310 liters therefore the surplus liters can be produced and sold in the market to generate extra revenue (2.50*155). Since the marginal cost of flame retardant is equal to market price Rodolfo can either buy or manufacture the paint (Jerry, Donald & Paul, 2006).
The budget help the management in controlling cost for instance the flexible budget helps to explain the causes of variance between the budgeted and actual cost and also in estimating the future cost relating to various cost items. The budget can also be used by management in deciding on whether to change the pricing of item for instance if lower prices contribute much to negative revenue variance then increase in price may result to favorable variance.
Budgets are also used by management to determine on acquisition of additional resources. For instance Rodolfo anticipate to increase unit produced which require additional investment in term of plant and machinery. It can specifically indicate which resources are required e.g. increase in quantity produced requires additional direct labor and materials beside other over head cost.
Besides information collected from budget and performance report ethics play a major role in making decision. Even though performance report indicate that it is better to adopt new hi-tech method in production this will require the firm to lay off extra workforce. Ethically it is unfair to lay off workers who had helped Rodolfo for many years and he may decide to continue with the earlier production method which was labor intensive.
The negative labor variance may require Rodolfo to reduce labor rate per hour in order to reduce labor cost however it may appear unfair to reduce workers pay while the rest of the firms are increasing pay (Balakrishnan, Sivaramakrishnan & Sprinkle, 2009).
The relevant accounting information for Rodolfo to consider while making decision is the future cost and profit and marginal cost. Historical cost or sunk cost have already occurred and are not relevant for any decision. Marginal cost shows the incremental cost of taking any decision and a decision to undertake any venture should only be undertaken when marginal revenue is greater than marginal cost. Future cost and revenue indicate whether the organization will make profit or loss.
Balakrishnan, R., Sivaramakrishnan, K. & Sprinkle, G. (2009). Management accounting,
John Wiley & Sons,
Jerry, J., Donald, E & Paul, D. (2006). Managerial Accounting: Tools for Business
Decision-Making, John Wiley & Sons. http://he-cda.wiley.com/WileyCDA/HigherEdTitle/productCd-047083546X,courseCd-AC0700,pageType-copy,page-detailedTOC.html, [accessed on 27 June 2009].
Marginal costing, Decision making using marginal costing,
[Accessed on 27 June 2009].
Marginal costing, http://www.globusz.com/ebooks/Costing/00000012.htm, [accessed on
27 June 2009].
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