Cost Reduction Strategies for Furniture Business

This assignment examines strategies to reduce costs and increase profitability for Exhibition Furniture, a company that manufactures desks. It includes a financial analysis of the company's budget, suggesting improvements like using machine-intensive production, increasing selling prices, implementing effective marketing strategies, adopting activity-based costing, and utilizing just-in-time inventory management.

Running Head: Management Accounting
Budgeting

Management Accounting 1
Part A
a) Revenue budget 2018
Particulars Amount
Sales (Units) 2000
SP $ 800.00
Total Revenue $ 16,00,000.00
b) Production Budget in units
Particulars Amounts
Expected Sales 2000
add Closing Stock of desk 300
less Opening Stock of Desk -200
No. of units to be produced 2100
c) Direct material usage and purchase budget for 2018
Direct material usage Quantity
Oaks
tops Oaks Legs
No. of desks 2100
Square meters per desk 3
No. of Legs per desk 4
Direct material requirement 6300 8400
(2100*3
) (2100*4)
Purchase Budget Oaks tops Oaks Legs
Production Required 6300 8400
Add: Closing Inventory 24 80
Less: Opening Inventory -40 -100
Units to be purchased 6284 8380
d) Direct Manufacturing Labour budget for 2018

Management Accounting 2
Particulars Amounts
No. of desks 2100
No. of hours per desk 3
Total hours required 6300
Rate per hour $ 20.00
Total Labour cost $ 1,26,000.00
e) Manufacturing overhead budget for 2018
Particulars Amounts
No. of units to be produced 2100
Variable manufacturing cost
(2100*20*3) $ 1,26,000.00
Fixed manufacturing cost $ 50,000.00
Total manufacturing overhead $ 1,76,000.00
f) Manufacturing overhead rate
Particulars Amounts
Total manufacturing overhead $ 1,76,000.00
Total hours required 6300
Manufacturing overhead rate $ 27.94
g) Manufacturing overhead cost per unit in
2018
Total manufacturing overhead $ 1,76,000.00
Units produced 2100
Manufacturing overhead cost for output $ 83.81
h) Value of closing stock unit
Direct Material Unit cost
Oak Tops (120*3) 360
Oak Legs (7*4) 28 $ 388.00
Direct Labour (55*3) $ 165.00
Manufacturing overhead $ 83.81

Management Accounting 3
i) Closing Inventory budget for
direct material and finished
goods.
Direct Material Inventory Units Rate Amount
Oak Tops 24 $ 120.00 $ 2,880.00
Oak Legs 80 $ 7.00 $ 560.00
Finished Goods Inventory
Desks 300 $ 636.81 $ 1,91,042.86
j) Cost of Goods Sold
Particular Amount
Opening Finished goods inventory
$
80,000.00
Add Direct Material
Opening Stock
$
4,000.00
$
500.00
Direct Material Purchases
$
7,54,080.00
$
58,660.00
$
7,58,080.00
$
59,160.00
Closing Stock
$
2,880.00
$
560.00
$
7,55,200.00
$
58,600.00
$
8,13,800.00
Add Direct Labour
$
3,46,500.00
Add Manufacturing cost
Variable
$
1,26,000.00
Fixed
$
50,000.00
$
1,76,000.00
Less Closing Inventory
$
1,91,042.86
Cost of goods sold 1225257.143
k) Income Statement for 2018

Management Accounting 4
Particulars Amounts
Sales $ 16,00,000.00
Cost Of Sales $ 12,25,257.14
Gross Profit $ 3,74,742.86
Marketing Costs $ 2,000.00
Non-Manufacturing Cost $ 10,000.00
Net Profit $ 3,62,742.86
l) Balance Sheet for 2018
Assets
Current Assets
Cash $ 3,82,742.86
Inventory $ 1,94,482.86
Non-Current Assets
Property Plant Equipment $ 5,50,000.00
Total $ 11,27,225.71
Liabilities
Current Liabilities $ 30,000.00
Non-Current Liabilities $ 59,340.00
Suspense account $ 25,142.00
Equity $ 10,12,742.86
Total $ 11,27,224.86

Management Accounting 5
Part B
To: Manager, Exhibition Furniture
From: Management Accountant
Date: 05-02-2018
Re: Strategies for cost reduction and increased profitability.
From the above budgeting processes, various areas have been identified where improvements can
be made to increase the profitability of Exhibition Furniture. The firm can use machine intensive
methods for the production process in place of using manual labour services. The use of machine will
not only help the company in reducing the total labour cost but it can also help the firm by
enhancing its productivity. The labour force of the company may also require certain training or
overtime premium if they stretch their working load. However, if machinery are employed in the
manufacturing of desk, these costs could be prevented. Also the firm can enhance its profitability by
increasing the selling price per unit of the desk to an acceptable extent. The firm can also increase
the sale of desks by offering some attractive discounts to the potential buyers. The number of
personal sales visits can be reduced so as to incur less marketing costs rather the firm must adopt
other methods of marketing its products such as issuing various kinds of advertisement to reach
more people who are willing to buy the furniture manufactured by the firm. Also, the change in the
method of inventory valuation can also result in higher profitability (Horngren et al., 2002). The
most appropriate method of inventory valuation is weighted average as in the case of Exhibition
Furniture as the inventory of the firm is turning over rapidly. Hence, use of First in First out method
of valuation of inventory is irrelevant in this case. The firm must also evaluate the option of
producing the raw materials required to manufacture the desks such as Oak Top and Oak Legs so as
to avoid the cost involved in the purchase of direct materials. The method of determining the cost of
the desks manufactured by the firm, the technique of activity based costing must be used instead of

Management Accounting 6
using the traditional costing methods for setting the prices of the products. The best strategy to
increase the sales of the firm is to adopt the attractive and cost-effective method of advertisements
to reach the wide range of customers. Also, the firm must implement just in time method of
inventory maintenance so that the cost of carrying the excessive inventory could be avoided such as
warehousing costs and interests costs on the funds blocked in purchase of unnecessary costs.
Therefore, the firm must determine the economic order quantity of inventory to be purchased so
that it can fulfil the demands of the customers within the reasonable time (Bromwich & Bhimani,
2005).
The use of above strategies and techniques of management accounting will definitely increase the
sales and profitability of the firm.

Management Accounting 7
References:
Bromwich, M., & Bhimani, A. (2005). Management accounting: Pathways to progress. Cima
publishing.
Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J.
(2002). Introduction to Management Accounting: Chapters 1-17. Prentice Hall.