Final Project

Deirdre Haley

Southern New Hampshire University

Acc 550: Cost Accounting

Professor Tabor

09/29/2024
 Final Project

As the management accountant here at Emerald Office Supply, Inc., I have been asked to

create an executive report about the budgeting process for our organization as we evaluate

strategies to lower our carbon footprint. In this report I will analyze the cost report based on the

break-even analysis and cos-volume-profit or CVP analysis. I will also analyze the financial and

operational strengths and weaknesses of the organization using data from the cash and master

budget. Finally, I will propose recommendations to our organization’s leadership panel based off

the previously mentioned analyses.

Analysis of Cost Report

Reviewing the information that has been included in the client profile, we can see that

there are both variable and fixed costs per box of binders. Fixed costs are defined as, “the portion

of the total cost that, within the relevant range, does not change with a change in the in the

quantity of a designed cost driver.” (Blocher et al., 2022, pg83). The fixed costs included are the

manufacturing overhead costs ($15,00) and the selling and administrative ($10,00). Variable

costs are defined as, “A cost those changes in total in response to changes in one or more cost

drivers.” (Blocher et al., 2022, pg83). The variable costs for manufacturing are the direct

materials ($15), direct labor ($3), manufacturing overhead ($10), and selling and administrative

($2).

Having a comprehensive knowledge of costing systems will allow us to make an

informed decision on the system that will benefit our organization the most. Costing is, “the

process of accumulating, classifying, and assigning direct materials, direct labor, and factory

overhead costs to products, services, or projects.” (Blocher et al., 2022, pg109). We will evaluate

both job-order costing as well as process costing.

 Job-order costing is defined as, “a product costing system that accumulate and assigns

costs to specific jobs, customer, projects, or contracts.” (Blocher et al., 2022, pg111). This

system of costing allows managers to calculate the profit earned on individual jobs and it gives

managers the advantage of being able to keep track of teams’ performances in terms of cost-

control, efficiency, and productivity. Job-order costing is best suited for companies needing final

costs that are unique to their project.

Process costing is defined as, “a product costing system that accumulates costs according

to processes or departments and assigns them to a large number of nearly identical products.”

(Blocher et al., 2022, pg187). Process costing relies on statistical calculations rather than actual

input and is best suited for continuous manufacturing setting.

With our organization generating office supplies, knowing the individual costs associated

with each job will give us an advantage over using process costing. We will have more

applicable data that will allow us to investigate profitable items and items not worth our

resources.

To create a break-even analysis, the following four steps should be taken: Ascertain the

variable unit costs. This is the cost of producing one unit of a good or product, including the cost

of storing and marketing the product. Next, we must establish fixed costs, which can be known

as overhead costs. Fixed costs include those costs that are required to keep the business in

operation. This is usually the budget of running the business for one month. Production costs are

excluded from this value. The third step is to determine the unit selling price for the good or

product. It is the most variable component of the analysis because it can be changed after

determining the break-even point on the graph. Finally, we must establish sales volume and the

unit price. Experimenting with these values will produce a new break-even point on the graph.”
(Breakeven Analysis, 2021, paragraph 5). Target profit planning is often used in break-even

analysis. When an organization has an estimated amount of profit they hope to achieve during a

specific period, this is their target profit. The formula for target profit planning is “derived by

evaluating the company's situation to achieve the break-even point where the company can bear

the fixed cost of the business expenditure and cover the necessary variable cost.” (Vaidya, 2024,

paragraph 6). The formulas can be used to solve for the revenue of sales or the sales per unit that

would be needed for the organization to reach their target profit. As we can see from the client

profile provided, the profit planning shows us that 1,300 units are required to generate $1,000 in

profit for the organization.

The Master budget is “an aggregation of all subunit budgets into an integrated plan of

action for the budget period.” (Blocher et al., 2022, pg369). A master budget is comprised of

both operating budgets as well as financial budgets. To prepare for this master budget we need to

produce budgeted pro forma financial statements which include the income statement, balance

sheet, statement of cash flows. An analysis that can be used with the information provided in the

master budget is aa sensitivity analysis. “We can think of sensitivity analysis as a tool or method

that budget planners use to determine the extent to which a change in the forecasted value of one

or more budgetary inputs affects individual budgets and the set of pro forma financial statements

that are produced as part of the master budgeting process.” (Blocher et al., 2022, pg386).

Performing this analysis allows organizations to isolate risks associated with components of their

operation and allows them time to develop plans on how to deal with these risks.

The operating cycle plays a significant role in determining the efficiency of a business

and directly impacts the master budget. “The operating cycle talks about the time it takes for a

business to turn it inventory over, or the time it takes to receive payment for goods and services
sold.” (Tamplin, 2024, paragraph 1). If completing the master budget leads to a concern of

inventory turn-over or cash collection, we can determine via the operating cycle how to best

increase inventory turn-over or decrease the time it takes for cash collection or if the operating

cycle can be shortened and the organization can operate more efficiently, then decisions can be

made by evaluating the master budget of how to reallocate resources.

There are differences in the operating cycle between several types of organizations with

different cost structures, as the cost structure of each business is related to the nature of the

activity of the business. For example, manufacturing organizations’ operating cycle is purchasing

raw materials, using those raw materials to manufacture a finished good, sell that finished good

to consumers, collect payment from consumers, use that payment to pay for operating costs.

Merchandising entities operating cycle is purchasing inventory from supplier, selling inventory

at a mark-up to consumers, collect payment from consumers, use that payment to pay operating

costs. Finally, service entities operating cycle is performing service, collect payment for that

service, use that payment to pay operating costs. The cost structure of each organization relates

to the operating cycle as businesses aim to reduce costs to a minimum to help decrease the time

of the operating cycle to ensure they are efficient and produce revenue.

Analysis of Master Budget

There is a powerful modeling technique that allows decision makers to assess the impact

of changes in the master budget. This tool is referred to as sensitivity analysis. As previously

mentioned, this analysis allows organizations to isolate risks and develop contingency plans.

Cost drivers are important during a sensitivity analysis as they have a direct impact on costs and

when performing a sensitivity analysis, we need to analyze the costs as well as any factors that

impact those costs to allow for proper budgetary planning based on different scenarios to allow
for optimized resource allocation. This is vital to the master budget and decision making as it

allows for leadership to understand the risks and opportunities associated with different scenarios

and allows them to make informed choices as well as to properly allocate resources for the

organization.

Budgeting and preparing budgets are essential tasks that must be done and evaluated on a

regular basis to ensure an organization is meeting their goals or making adjustment to operations

to be able to meet those goals. There are different budgeting techniques that organizations can

use, each having various levels of effectiveness.

The first budgeting technique we will analyze is the master budget process. Short-term

objectives serve as the basis for preparing this master budget for a specific period. “The master

budget comprises both operating budgets and financial budgets.” (Blocher et al., 2022, pg368).

When preparing the master budget, it is imperative to ensure the data is accurate. When

managers and other stakeholders are using the data presented in the master plan to help with

forecasting and decision-making, they are unable to do that to efficiently help the organization if

the data is not accurate in the master budget.

Incremental budgeting is the most common type of budget and “takes last year’s actual

figures and adds or subtracts percentages to obtain the current year’s budget” (Schmidt, 2024

paragraph 4). This system works well for organizations that have cost drivers that do not change

from year to year but can lead to inefficiencies, cause budgetary slack, and can ignore external

drivers of activity and performance.

Another approach to budgeting is zero-based. With this technique, “managers are

required to prepare budgets each period from a baseline of zero.” (Blocher et al., 2022, pg388).

This technique allows no activities or function to be included in the budget unless management
can justify the need. The benefit requires an in-depth review of all budget items to encourage

managers to be aware of all activities and functions and outline the usefulness or address the

waste of resources. Unfortunately, the time needed to implement this form of budgeting is

monumental and may be impossible to truly implement.

Activity-based budgeting is another technique that can be used to help an organization.

This “is an extension of the traditional form of activity-based costing and starts with the

budgeted output and segregates costs required for the budgeted output into homogeneous activity

cost pools.” (Blocher et al., 2022, pg389). This is a top-down budget style that focuses on the

activities and associated resources needed to satisfy the projected level of customer demand. This

method facilitates continuous improvement “and facilitates the identification of high-value-

added activities and the reduction or elimination of low-value-added activities.” (Blocher et al.,

2022, pg389.)

Another technique is time-driven activity-based budgeting. This “is a method of budget

preparation used in conjunction with TDABC system and it works backward from forecasted

sales volumes to calculate in a straightforward way resource spending needed to support

production and sales plans.” (Blocher et al., 2022, pg389). This can be used to streamline and

reduce the cost of activity-based budgeting processes allowing managers to plan for the level of

capacity needed more accurately.

Kaizen budgeting can also improve budget effectiveness that “incorporates continuous

improvement expectations in the budget.” (Blocher et al., 2022, pg389). This system works well

as it is not limited to internal improvements and helps to promote active engagement in the

reforming of practices or changes practices to help improve efficiency.

 When preparing the master budget, it is imperative to ensure the data is accurate. When

managers and other stakeholders are using the data presented in the master plan to help with

forecasting and decision-making, they are unable to do that to efficiently help the organization if

the data is not accurate in the master budget. When organizations create goals and objectives,

they need to create a strategy to reach those goals and part of that strategy is determining how

much revenue is required to reach those goals. As we have a goal of decreasing our carbon

footprint, we can evaluate the changes to our fixed and variable costs per box and perform a new

break-even analysis to include profit planning and have a new goal for units sold and then we

can develop a marketing plan to ensure we reach and/or surpass those goals. We can also use that

information to determine if the changes to decrease our carbon footprint may require adaptations

due to the increased costs and the impact it can have on our manufacturing process. Budgeting

can also help with prioritizing goals and help with financing opportunities.

Activity-based accounting is defined as, “a costing approach that assigns resource costs

to cost objects based on activities performed for the cost objects.” (Blocher et al., 2022, pg145).

With the identification of cost drivers, or the specific factors that cause the cost of an activity to

increase or decrease, being a foundational principle of activity-based costing, organizations can

understand the relationship between activities and the associated costs. The impact that this

method has on an organization is allowing the company to assign overhead and indirect costs to

related products and services. This allows organizations to form more appropriate pricing

strategies as well as profit planning.

To understand the master budget, we need to understand the budget. Budget Definition:

“A detailed plan for the acquisition and use of financial and other resources over a specific

period of time- for example, a year, a month, or a quarter.” (Blocher et al., 2022, pg367). This
brings us to the Master Budget Definition: “An aggregation of all subunit budgets into an

integrated plan of action for the budget period.” (Blocher et al., 2022, pg368). The purpose of a

master budget is to develop a roadmap for business financial activities and help guide the

decision-making process of managers and executives. The master budget provides a holistic view

of the financial activities to aid managers and executives in strategic decision making based on

available financial resources. This budget also assists in aligning the organization’s financial

goals with their strategic objectives as it allows them to determine financial priorities and

allocate resources accordingly. (De Vera, 2024)

The components of a master budget include strategic goals, long term objectives and

long-term plans, short-term objectives, and the capital budget. The operating budgets that are

included in the master budget include the sales budget, selling and administrative expense budget

as well as the production budget (made up of the direct materials, direct labor, and factory

overhead budgets, the budgeted cost of goods manufactured and costs of goods sold, and the

budgeted income statement. Finally, the last portion that makes up the master budget is the

financial budgets that include the cash receipts budget, cash budget and the budgeted balance

sheet. There are a few key components that highly impact the financial stability of the

organization, the sales budget, cash budget, production budget, and the administrative expenses

budget.

“The sales budget is referred to as the cornerstone of the entire master budget.” (Blocher

et al., 2022, pg372). The sales budget shows the forecasted sales for the organization to allow the

company to see what revenue they may have to pay for expenses and budget for profit.

The cash budget “depicts the cast effects of all budgeted activities.” (Blocher et al., 2022,

pg380). This information helps management take steps to ensure they have sufficient cash on
hand to complete activities and tasks or to ensure there is enough time to generate financing that

is needed for the given period.

The planned production for a given period is the production budget. This relates to the

organization’s financial stability by allowing production managers to review the feasibility of

this budget to ensure the results are reasonable and attainable or if it needs to be revised or find

alternatives to satisfy the demand.

The final component to highlight is the administrative expenses budget. This should

include all non-manufacturing costs to the organization including salaries. These costs are often

fixed and will be used to ensure the company operates efficiently. The organization can evaluate

the revenue needed to cover this budget and can help provide a complete picture of financial

performance for the organization.

To conclude, Emerald Office Supply Inc. must strengthen their financial and operational

resilience to help maintain their competitive advantage in their industry. It is critical for Emerald

Office Supply, Inc. to leverage sensitivity analysis, appropriate budgeting techniques and

activity-based costing while mastering the budget components to help them achieve long-term

success.

Executive Summary

Based on my analysis of the cost report and the master budget, I have listed some

recommendations for the organization’s leadership panel.

Emerald Office Supply, Inc., utilizes a sensitivity analysis to help measure the impact of

various changes in key variables on the financial outcomes of the organization. Based on the data

provided we can see varying cash receipts across the second quarter months. In April there was

$248,500, in May there was $244,500, and in June there was $260,00. We can also see
differences in the cash disbursements as well, April had ($255,000) in total disbursements, May

had ($245,000) and June had ($248,000) in total disbursements. This helps to highlight the

sensitivity of cash flow to sales performance and operational expenses.

Emerald Office Supply, Inc. can use various budgeting techniques to reduce the total

costs of future purchases in the organization. One budgeting technique that is used based on the

data provided in the client profile is incremental budgeting. We can see that there is stability in

purchases throughout the second quarter as well as the constant operating costs at $95,000 per

month. As previously mentioned, this system works well for organizations that have cost drivers

that do not change from year to year but can lead to inefficiencies, cause budgetary slack, and

can ignore external drivers of activity and performance.

There are several strategies that I would recommend implementing to help improve future

profitability. Activity-based costing is a way to allocate overhead costs to allow for greater

visibility into the cost component of the organization. “Activity-based costing considers all

potential cost activities instead of relying on just one variable (labor hours or machine hours)”

(Schmidt, 2023, paragraph 3) When using activity-based costing, an organization can use

realistic costs of production which can help generate more accurate profit planning and

budgeting for the organization. Another advantage of this system is that it identifies inefficient

processes, targets for improvements, and determines product margins more precisely. Activity-

based costing discovers which processes have unnecessary and wasted costs and offers a better

understanding as well as the justification of costs and manufacturing overhead (Woodruff, 2019).

Additionally, I would recommend the Just-In-Time Inventory. Inventory is an asset for

many organizations. A just-in-time inventory method is an inventory method that focuses on

keeping as little inventory on hand as possible and is designed to help reduce production costs
while ensuring the highest quality products. (Baluch, 2024). This method helps to reduce waste,

increase production, improve quality as well as creating flexibility within the organization. While

we are looking at the process of reducing costs, this method helps to reduce costs by eliminating

excess inventory and overstocking which can be both space and financially consuming.

Another strategy would be evaluating the cost of quality. There is an equation that will allow you

to calculate the cost of quality within your organization. The total cost of good quality plus the

total cost of poor quality equals the cost of quality for your organization. The cost of good

quality is prevention and appraisal costs that are used to keep failures low and the cost of

material inspections and quality audits. The cost of poor quality is internal and external failures

like problems occurring before the product reaches consumers and failures that occur after such

as warranty claims. Evaluating the four mentioned costs of quality can help organizations

identify areas that need improvement organizations are able to improve quality while reducing

costs. Addressing areas such as, “production process issues to reduce the likelihood of defects

and the need to rework or scrapping of products can decrease the cost of poor quality.” (Nahil,

2024, paragraph 35) Most organizations have the goal of reducing costs without reducing quality

and addressing the connection between the two is essential in achieving that goal.

Finally, continuous improvement strategies can help to enhance the net income of your

organization. These strategies are ongoing efforts to improve all elements of an organization that

is based off the belief “that a steady stream of improvements, diligently executed, will have

transformational results.” (Dewar et al., 2019, paragraph 1). One of the most important parts of

these strategies is the fact that these improvements are frequent and can include both big and

small improvements. By innovating how organizations do what they do, engaging employees in

sharing knowledge and helping to identify improvement ideas and exploring new and better
ways to deliver to consumers by responding to external environments are crucial to the success

of these strategies on improving net income to an organization.

An incredibly useful tool that informs the strategic analysis of organizations is the

balanced scorecard. “Balanced scorecards help to provide a comprehensive performance

measurement tool that reflects and measures critical for the success of the firm’s strategy and

thereby provides a means for aligning the performance measurement in the firm to the firm’s

strategy” (Blocher et al., 2022, pg50). A balanced scorecard evaluates strategic objectives and

KPIs within four (or five) categories, financial, customer, internal business processes, learning

and growth, and sometimes environmental, social, and governance (ESG). This method helps to

identify and improve internal business processes to help with the outcomes by measuring past

performance to provide feedback to make strategic decisions for the improvement of the

organization.

“The balanced scorecard is a tool that recognizes that organizational responsibility to

different stakeholders such as employees, suppliers, customers, business partners, the community

and shareholders.” (Mott, n.d., paragraph 2). The balanced scorecard gives clear and concise

communication about the company's direction and priorities. After determining the strategic

goals for each category of the balanced scorecard, there need to be KPIs assigned to track

progress in each of these categories. It is imperative to keep in mind the audience you are

presenting the information to, as the audience for the scorecard ranges so drastically, the

information that should be presented will depend on the stakeholders it is being presented to.

“Most Balanced Scorecards need to be reported and reviewed quarterly; this frequency provides

effective executive control over the strategy implementation process.” (Howard, 2019, paragraph

14). When determining if objectives from the organization’s balanced scorecard were successful,
they must measure the improvement on the KPI’s. If the KPI’s are not consistent, measuring

success of the objectives will be incredibly difficult if not impossible. It will lead to inefficacy

and could cause the rollout of the balanced scorecard to fail.

Cost data analysis and the master budget have a significant impact on the future

profitability of an organization. Both items help to provide insights into the cost structures and

can help identify areas in need of improvement and help identify areas where costs can be

reduced. With this, the organizations are able react to changes appropriately to help provide

financial stability and maintain a competitive advantage. Both the cost data analysis and the

master budget can help when organizations develop ESG initiatives, by allowing the

organization a clear look into the impact of these initiatives on costs and the master budget. This

will allow for the organization to evaluate the changes they must make to implement these

initiatives and weigh on the positive and negative aspects they may present, to allow for

informed decision making.

The financial recommendations based on the cost data analysis are as follows:

 Implement activity-based costing to help control and manage costs, decrease

breakeven points, and increase revenue.

 Implement Just-In-Time inventory to decrease variable costs to help decrease

breakeven point and increase revenue.

 Evaluate and determine cost of quality and make any necessary changes to help

decrease costs as well as breakeven point to increase revenue.

 Implement continuous improvement strategies.

 Complete a balanced scorecard and implement quarterly reviews to allow for any

improvement strategic objectives and goals and allow for the organization to

make improvement to the five categories and help track the ESG initiative.
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