What recommendations would you make to decrease costs and increase profit?
Refer to the Self-Study Problem at the end of Chapter 3 in your text. You are given data pertinent to Spartan Products Company. Using this information, prepare a statement of cost of goods manufactured and an income statement for the year ending December 31. Refer to Exhibit 3.15A of your text for assistance in preparing these statements. Use these statements to answer the following questions:
Is the company making a profit?
What are the key drivers of cost?
What recommendations would you make to decrease costs and increase profit?
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When a product or service is created or offered, there are various types of costs associated with it, which can affect the overall profitability of the business. Some of these costs may seem obvious, such as the cost of materials and labor, but others may be less apparent, including overhead and administrative expenses. To determine the profitability of a product or service, companies use tools such as a statement of cost of goods manufactured and an income statement. This paper will use the data from Spartan Products Company to prepare these statements and answer questions related to profitability and cost drivers.
Statement of Cost of Goods Manufactured and Income Statement
Using the data from Spartan Products Company, we prepared a statement of cost of goods manufactured and an income statement for the year ending December 31. Exhibit 3.15A of the text was used as a guide for preparing these statements. The statements are shown below:
Statement of Cost of Goods Manufactured
Spartan Products Company
Cost of Direct Materials
Less: Ending Inventory
Total Cost of Materials
Total Manufacturing Cost
Add: Beginning Work in
Less: Ending Work in
Cost of Goods Manufactured
Spartan Products Company
Cost of Goods Sold
Add: Cost of Goods
Less: Ending Inventory
Total Cost of Goods Sold
Total Operating Expenses
Based on the income statement, Spartan Products Company generated sales revenue of $150,000 and had a gross profit of $68,000. After deducting operating expenses of $33,000, the company had a net income of $35,000. Therefore, Spartan Products Company is making a profit.
Profitability is a critical measure of a business’s success. It refers to the ability of a company to generate profits from its operations, and it is essential to the long-term sustainability and growth of the business. Profitability is calculated by comparing the revenue generated from sales to the costs associated with producing and selling products or services. In other words, profitability is the amount of money a business earns after deducting all its costs.
There are several reasons why profitability is important to a business. Firstly, profitability is a key indicator of the health of a business. If a company is consistently profitable, it is a good sign that it is operating efficiently, and its products or services are in demand. This, in turn, can help to attract investors and lenders, who are more likely to invest in or lend money to a profitable business.
Secondly, profitability is essential to a business’s ability to reinvest in its operations and continue to grow. Profitable businesses have the resources to invest in new products, technologies, and marketing strategies that can help to increase sales and revenue over time. Without profitability, a business may struggle to invest in its future growth and may eventually fail.
Thirdly, profitability is necessary to pay dividends to shareholders. Shareholders invest in a company with the expectation of receiving a return on their investment in the form of dividends. If a company is not profitable, it may not be able to pay dividends to its shareholders, which could lead to a decrease in shareholder confidence and a decline in the company’s stock price.
To improve profitability, companies can focus on increasing revenue and decreasing costs. One way to increase revenue is by expanding the product line or exploring new markets. This can help to increase sales and generate additional revenue. Additionally, companies can focus on improving customer satisfaction, which can lead to increased sales and repeat business.
Reducing costs is another way to improve profitability. Companies can focus on reducing the cost of goods sold by negotiating better deals with suppliers or sourcing materials from cheaper suppliers. Additionally, increasing efficiency in the production process can help to reduce direct labor costs, further reducing the overall cost of goods sold.
Reducing manufacturing overhead costs is another area where companies can look to decrease costs. By identifying and eliminating unnecessary expenses, companies can decrease operating expenses, further increasing profitability.
In conclusion, profitability is a critical measure of a business’s success. It is essential to the long-term sustainability and growth of a company. By focusing on increasing revenue and decreasing costs, companies can improve profitability, attract investors and lenders, and reinvest in their operations to continue to grow. By regularly reviewing financial statements such as the statement of cost of goods manufactured and income statement, businesses can identify areas for improvement and make informed decisions to increase profitability. Ultimately, profitability is the key to a company’s success, and businesses that prioritize profitability are more likely to achieve long-term success and stability.
Key Drivers of Cost
To determine the key drivers of cost, we examined the statement of cost of goods manufactured. The direct materials cost was $46,000, while direct labor cost and manufacturing overhead cost were $30,000 and $24,000, respectively. Therefore, direct materials were the most significant driver of cost for Spartan Products Company.
Understanding the key drivers of cost is essential to managing costs and increasing profitability. Key cost drivers are the factors that influence the cost of goods or services and can vary depending on the industry and the company’s operations. By identifying the key drivers of cost, businesses can make informed decisions to reduce costs and improve profitability.
One key driver of cost is the cost of materials. The cost of raw materials, such as metals, plastics, and fabrics, can have a significant impact on the cost of goods sold. Businesses can reduce material costs by negotiating better deals with suppliers or by finding alternative materials that are cheaper or more readily available. Additionally, companies can focus on reducing waste by implementing lean manufacturing processes, which can help to minimize material usage and reduce overall costs.
Another key driver of cost is direct labor. Direct labor costs are the wages paid to employees who directly contribute to the production of goods or services. Labor costs can be influenced by factors such as wage rates, employee productivity, and the number of employees required for a particular task. To reduce direct labor costs, companies can focus on increasing productivity by providing training and implementing efficient production processes. Additionally, companies can explore automation or outsourcing options to reduce the number of employees required for certain tasks.
Manufacturing overhead costs are another key driver of cost. Manufacturing overhead costs are the indirect costs associated with producing goods or services, such as rent, utilities, and maintenance. Overhead costs can be reduced by identifying and eliminating unnecessary expenses, such as excess inventory or inefficient equipment. Additionally, companies can explore options for shared services or outsourcing non-core functions, such as accounting or IT support.
Marketing and advertising expenses are also key drivers of cost. Businesses can reduce marketing and advertising costs by focusing on targeted advertising, using social media and other low-cost marketing channels, and reducing spending on traditional advertising methods. Additionally, companies can explore partnerships and sponsorships as a way to reach a broader audience without incurring significant advertising costs.
Finally, administrative expenses can be a significant driver of cost. Administrative expenses include expenses related to running a business, such as salaries for administrative staff, office rent, and utilities. To reduce administrative expenses, companies can explore options for remote work or shared office space, implement cost-saving measures for office supplies and equipment, and streamline administrative processes to reduce the number of administrative staff required.
In conclusion, understanding the key drivers of cost is essential to managing costs and improving profitability. By identifying the factors that influence the cost of goods or services, businesses can make informed decisions to reduce costs and increase profitability. Key drivers of cost can vary depending on the industry and the company’s operations, but common drivers include material costs, direct labor costs, manufacturing overhead costs, marketing and advertising expenses, and administrative expenses. By regularly reviewing financial statements such as the statement of cost of goods manufactured and income statement, businesses can identify areas for improvement and make informed decisions to reduce costs and increase profitability.
To decrease costs and increase profit, Spartan Products Company could consider the following recommendations:
Reduce the cost of direct materials by sourcing materials from cheaper suppliers or negotiating better deals with current suppliers.
Increase efficiency in the production process to reduce direct labor cost.
Reduce manufacturing overhead cost by identifying and eliminating unnecessary expenses.
Increase sales revenue by expanding the product line or exploring new markets.
Reduce operating expenses by finding ways to streamline processes and reduce unnecessary expenses.
In conclusion, the statement of cost of goods manufactured and income statement provide valuable information to help businesses determine the profitability of their products or services. The data from Spartan Products Company shows that the company is making a profit, but there are opportunities to decrease costs and increase profitability further.
Direct materials were identified as the most significant driver of cost for Spartan Products Company. Therefore, the company could focus on reducing the cost of materials to decrease overall costs. This could be achieved by negotiating better deals with current suppliers or sourcing materials from cheaper suppliers. Additionally, increasing efficiency in the production process could help to reduce direct labor costs, further reducing the overall cost of goods manufactured.
Reducing manufacturing overhead costs is another opportunity for Spartan Products Company to decrease costs. Identifying and eliminating unnecessary expenses is one way to achieve this. The company could review expenses such as rent, utilities, and maintenance costs to determine if there are any areas for cost reduction.
Increasing sales revenue is another way to improve profitability. Expanding the product line or exploring new markets could help to increase sales and generate additional revenue. However, this would need to be carefully considered to ensure that any additional costs associated with product expansion do not outweigh the potential benefits.
Reducing operating expenses is also an area where Spartan Products Company could look to decrease costs. Finding ways to streamline processes and reduce unnecessary expenses could help to decrease operating expenses, further increasing profitability.
Overall, the statement of cost of goods manufactured and income statement are critical tools for businesses to use when evaluating profitability and identifying key cost drivers. By analyzing these statements, companies can identify areas for improvement and make informed decisions to increase profitability.
In conclusion, Spartan Products Company is making a profit, but there are opportunities for the company to decrease costs and increase profitability further. By focusing on reducing the cost of materials, increasing efficiency in the production process, reducing manufacturing overhead costs, increasing sales revenue, and decreasing operating expenses, Spartan Products Company can improve profitability and continue to grow its business. By regularly reviewing these statements and making necessary adjustments, Spartan Products Company can stay competitive and achieve long-term success.