Financial Year Assessment Wildwood Creations Ltd

Question: Describe about the Financial Year Assessment for Wildwood Creations Ltd. Answer: Executive Summary Wildwood is a small shop and factory that has specialized in makings, repairing and restoration of wooden outdoor entertainment furniture. The firm lowered the cost of minor repairs after a long period of time. The firm also decreased the price actual price of major repair in the current year of operation. All these price decrease are as a result of increased competition that is threatening Wildwood performance. Sam Dekkan who is a part owner and sets prices for the services and product has requested a review in order to understand the portion of profit that is as a result of price decrease and the other portion as a result of other related factors. The report is an analysis of budgeted and actual Operating Profit statements of Wildwood Creations Limited for the year starting July 2015 and ending June 2016. The report aims to answer with support of analysis the disparity in proportionate of the planned budget and the actual outcome for the year. The disparity has caused a general decrease of profits by $2917 despite the company receiving increased revenues by $55390. Comparison of the differences between the planned and actual outcome, flexed budget and compensation analysis has been used to offer explanation about the Wildwood Creation limited situation. From the analysis, the difference in estimated budget and actual outcome is evident in the direct materials used. The business planned budget underestimated labour and material use by $ 54607 less than the actual used in the year. Decrease in prices of actual major repairs increased the number of jobs from the projected 390 to 450 jobs. Reduction in price charges on minor repairs did not reciprocate the projected number of 1830 jobs and turned to be 1740 jobs. There were a gross decreased number of jobs from the budget of 3330jobs to 3295 actual jobs. It is noted from this analysis that despite the gross decreased jobs as in planned budget, there was no decrease in the amount of cost incurred in the actual outcome. The compensation to profit ratio for the company show that there was an estimation of $26.36 for every $1 of profit to be earned. The actual ratio turned to be $34.26 to every $1 in profit earned in the year 2015-2016. This showed that there was underestimation of the costs of labour to yield one dollar profit for the company. Also, the planned percentage for compensation to total revenue was 2.21% less than the actual percentage. This analysis showed that the company is labour intensive and was increasingly having much of it return dependent on the labour input. Using a flexible budget to analyze outcome when actual jobs are accounted for resulted to estimated losses. Revising the planned budget showed losses on the budget. There is a deficit of $32536 on the flexible budget of Wildwood Limited. This indicated that cor respondent costs and revenues have to be matched to yield profits to the company. Therefore, it can be said that flexible budget analysis established that there was other disparities in the planned budget other than in the estimation number of jobs. From the analysis, profits of Wildwood depend on the efficiency of the labour employed and compensation of employees. Therefore, the margins of profits can be increased by managing direct labour input and offering competitive prices. It recommended that allocation is accurately and proportionally indicated by the accounting department to allow the following Overestimate of expenses and underestimate of income. Overestimating expenses will enable the business to deal with contingent expenses while underestimating income will build a safety factor in the business. This will reduce business frustrations of being over optimistic. Also the management should work on the efficiency of resources in the business. Wildwood being a labour intensive business, control and monitoring mechanisms should be put in place to ensure optimal utilization of the labour to increase profit earned by a unit of labour. Finally, it important for the business to try to minimize it cost on services, products and expenses in order to offer competitive prices relative to its competitors. Lowering the price charge of product or service has a high yield on profits than increased advertisements. Appendix 1 Schedule 1: showing the differences between the planned outcomes and Actual outcomes for the year 2015-2016 WILDWOOD CREATIONS Ltd Differences in Budgeted and Actual Outcomes (Based on 2015-2016 financial year) Particulars Planned outcomes Percentage cost allocation of Budgeted cost Actual outcomes Percentage cost allocation of actual cost Differences (planned-Actual) in $ Total revenues $ 947800 $ 1003190 -55390 Owner salaries-bonus $ 47390 5.1% $50160 5.1% -2770 Owners salaries-base $ 180000 19.4% $180000 18.2% 0 Major repairs, salaries $172000 18.5% $ 172000 17.4% 0 Minor repairs, wages employees $102480 11.0% $151032 15.3% -48552 Rush Jobs, Wages $4050 0.4% $4455 0.5% -405 Materials for new tables $ 72800 7.8% $75600 7.7% -2800 Replacement parts $ 224400 24.2% $224945 22.8% -545 Transportation $44289 4.7% $43824 4.4% 465 Total Direct cost $847409 $902016 -54607 Contribution $100391 $101174 -783 Advertising $15000 1.6% $17000 1.7% -2000 Depreciation $6000 0.6% $6000 0.6% 0 Office rent $52000 5.6% $54000 5.5% -2000 Miscellaneous $8200 0.9% $7300 0.7% 900 Total percentage 100% 100% Total overhead $81200 $84900 -3700 Operating profit $19191 $16274 2917 (Appendix continued) Schedules of Differences between the planned Volumes of number of jobs and hour and Actual numbers of Jobs and Hours used per job for the year 2015-2016 Job type Budgeted Volume -No. of jobs Budgeted Hours-Per Jobs Actual Volume No of Jobs Actual Hours Per Jobs Differences in Volume of jobs(Budgeted-Actual) Differences in Hours per Job Major repairs (salary) 390.00 7.00 450.00 7.00 -60 0 Minor Repairs (wages employees) 1,830.00 2.00 1,740.00 3.10 90 -1.1 Restoration jobs -salary 540.00 6.00 510.00 7.50 30 -1.5 Making of new Furniture -salary 520.00 14.00 540.00 13.00 -20 1 Rush-jobs minor repair outsourced 50.00 3.00 55.00 2.80 -5 0.20 Total 3330 3292 35 Appendix 2 Schedule 2: Compensations and income comparison for Wildwood Creations Ltd for the year 2015-2016 Wildwood Creations Ltd For the 2015-2016 financial year Revenues $947800 $ 1003190 Owners Salaries 180000 180000 Owners bonus 47390 50160 Major repairs- salaries $172000 $172000 Minor repairs- wages $102480 $151032 Rush jobs-wages $4050 $4455 TR-TLC $441880 $445543 Compensation to profit ratio = Total labour cost /profits Estimated compensation to profit ratio= 505920/19,191 = $26.36 Actual compensation to profit ratio= 557647/16,274 = $34.26 Estimated percentage of total labour to total revenue= 100*505920/947800=53.38% Actual percentage of total labour to total revenues= 100*557647/1003190=55.59% Appendix 3 Schedule 3: Revised Budget Wildwood Creations Ltd Revised Budget For the year July 2015 to June 2016. Total Revenue $947,800 Costs: Owner Salaries - base $180,000 Owner Salaries - bonus $50,160 Major repairs: salaries $151,032 Minor Repairs: wages employees $172,000 Rush Jobs: wages $4,455 Materials for new tables $72,800 Replacement parts $224,400 Transportation $44,289 $899136 Contribution $48664 Advertising $15,000 Depreciation $6,000 Office Rent $52,000 Miscellaneous $8,200 $81,200 Operating Profit $(32536) References Bamber, L., Braun, K., Harrison, W. (2008). Managerial accounting. Upper Saddle River, N.J.: Pearson Prentice Hall. Davis, C. Davis, E. (2012). Managerial accounting. Hoboken, N.J.: John Wiley Sons. Porter, P. Gallagher, M. (2004). Revised RD Budgets for Funding Postponements. The Journal Of Cost Analysis Management, 6(2), 58-78. https://dx.doi.org/10.1080/15411656.2004.10462423 Winters, D. (2008). Introduction and executive summary. Managerial Finance, 34(2). https://dx.doi.org/10.1108/mf.2008.00934baa.001