ATENEO DE MANILA UNIVERSITY
Graduate School of Business
A Study on Establishing Standard Managerial Accounting Procedures
for Vaquform Inc.’s Spin Off Projects
In partial fulfillment of the requirement in Managerial Accounting - S20
Submitted by:
Florendo, Marinella
Labrador, Angelo Gabriel
Leyran, Lorraine Keeshia
Submitted to:
Prof. Susana L. De Jesus
May 13, 2023
TABLE OF CONTENTS
I.
Introduction
A. The Manufacturing Industry
B. Company Background
C. Case Presentation & Discussion
a. Current Situation
b. Statement of the Problem
c. Objectives
d. Scope & Limitations of the Study
II.
Case Analysis
A. Analysis of the Case and Its Effects on Financial Metrics of the Firm
B. Proposed Spin-Off Development Stages and Corresponding Accounting Tools
C. Results
III.
Recommendations & Conclusions
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INTRODUCTION
I.
The Manufacturing Industry
The history of the manufacturing industry can be dated back to the 19th century when
raw materials were transformed into usable products; this period was referred to as the Industrial
Revolution (Zeidan, 2023). The advancements in technology lead to the rise of factories,
powered by steam engines, where mass production became possible. As manufacturing
techniques developed over the years, the industry saw an increase in the implementation of
assembly line production (Cooper & Wilkinson, 2022). This enabled companies to have a
standard in production of goods, improve efficiency and productivity. Mass production reduced
the cost of production which resulted in more affordable products for consumers.
There was a significant change in the industry after World War II wherein the use of
computers
led
to
the
automation
of
the
production
processes
(Burton,
N.A.).
Computer-controlled machinery and robotics increased productivity, precision, and flexibility in
manufacturing. This period saw the rise of industries such as automotive, aerospace, electronics,
and consumer goods. In the latter part of the 20th century, there was an increase in the
globalization of manufacturing (Manufacturing Business Technology, N.A.). Companies began
to establish global supply chains while sourcing raw materials from different countries to reduce
cost.
In the 21st century, it is characterized by the digital transformation and integration of
technology into manufacturing processes. Automation, robotics, artificial intelligence (AI),
Internet of Things (IoT), and big data analytics are revolutionizing production systems nowadays
(Craig, 2018). Smart factories and interconnected systems enable real-time data analysis,
predictive maintenance, and customization of products to meet individual customer needs.
As it has been proven throughout the history of the manufacturing industry, it has
undergone significant transformations which were driven by technological advancements,
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economic changes, and evolving customer needs. To this day, the industry still continues to
evolve as it embraces new technologies that improve efficiency, sustainability, and innovation.
II.
Company Background
Vaquform Inc., founded in 2017, is a hardware technology startup company focused on designing
and manufacturing vacuum forming machines. Since its founding, it has sold thousands of its
flagship machine, the DT2 Desktop Vacuum Forming Machine, around the world. What was
once designed specifically for product designers, the DT2 is now used in many different
industries such as toy design, cosplay, food and beverage, soap making, furniture design,
sustainable manufacturing, medical equipment, packaging, and many more.
Image 1. DT2 Desktop Vacuum Forming Machine
As part of Vaquform’s efforts to be the leading vacuum forming technology company in
the world, the company has started conducting research and development on niche industries
with the intention of developing projects into spinoff companies or brands. Among these efforts
are in the custom chocolate mold making industry through their spinoff brand, Yummy Molds.
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Yummy Molds provides custom chocolate molds for local Filipino chocolatiers. Before
Yummy Molds, chocolatiers would usually purchase custom molds through large scale
manufacturers, requiring them to pay hundreds of thousands of pesos for a single mold. The huge
cost prevents small scale chocolatiers from availing their services and causes them to settle with
generic off-the-shelf molds. With Yummy Molds, small scale chocolatiers can purchase molds
customized with their own or their client’s branding and logo at affordable prices.
Image 2. Custom Molds by Yummy Molds
Yummy Molds has given their clients the capability to cater to more customers, thereby
increasing their profits. This is a testament to the brand’s mission to empower chocolatiers with
the ability to expand their creations beyond what standard chocolate molds can provide. Yummy
Molds continues to work towards its vision of a Filipino chocolate industry where chocolates
look as delicious as they taste, thanks to their technology.
III.
Case Presentation and Discussion
A. Current Situation
As a hardware technology startup company focused on design innovations,
Vaquform Inc. does not set limited budgets on research and development projects. This is
due to the fact that product development expenses constantly change, depending on the
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direction it has taken. Research and development expenses are approved by the
company’s owner and Chief Executive Officer as long as the prices are reasonable and
the company has generated enough revenue to afford it.
However, as Vaquform Inc. launches more segmented projects such as spin off
projects, the company needs to establish standard operating procedures to ensure proper
planning, monitoring, and control of projects.
B. Statement of the Problem
Given the issue at hand, this study aims to answer the following questions:
1. From a managerial accounting perspective, what tools can be used to
establish standard control and monitoring procedures for spin off projects?
2. Based on the tools recommended, what information about the spinoff
projects should be determined to properly utilize the procedures?
3. How can these tools be applied to Yummy Molds?
C. Objectives
This study aims to achieve the following objectives:
4. Identify managerial accounting tools that can be used to establish standard
control and monitoring procedures for Vaquform Inc. spinoff projects.
5. Determine the minimum information needed from spin off projects to
properly utilize the recommended procedures.
6. Apply recommended managerial accounting tools to Yummy Molds.
D. Scope and Limitations of the Study
Vaquform Inc. is a company primarily composed of designers and engineers. To
reduce the learning curve needed to properly implement the recommendations, this study
will simplify some of the managerial accounting tools recommended.
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This study is also conducted with the assumption that Yummy Molds has only one
type of product. Arbitrary costs were assigned to honor the company’s request to keep
details confidential.
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CASE ANALYSIS
I.
Analysis of the Case and Its Effects on Financial Metrics of the Firm
A manufacturing company is a type of business that deals with the production of goods
by converting raw materials, components, or parts into finished goods (U.S. Bureau of Labor
Statistics, N.A.). Typically, these companies usually have factories, equipment, and a workforce
to carry out the various functions of the manufacturing operations such as assembly, fabrication,
or chemical processing. Manufacturing companies play an important role in the development of
economic growth.
Meanwhile, managerial accounting focuses on providing financial and analysis to key
stakeholders — primarily the management and internal users (CFI Team, 2023). The gathered
information usually becomes the basis for making critical business decisions for the benefit of
the company and improve its overall performance. In the context of a manufacturing company,
the managerial accounting framework can help address several challenges that the company
faces.
In addition, accounting tools offer several benefits to manufacturing companies by
helping them manage their financial information, track costs, and make informed decisions. The
benefits of having established accounting tools are as follows:
1. Financial record-keeping: It provides an overall structure on how a company organizes its
financial transactions. Accounting allows companies to maintain accurate data and
up-to-date financial information which includes sales, expenses, acquisitions, and
revenue.
2. Cost tracking & control: Manufacturing companies usually have numerous costs such as
raw materials, direct labor, overhead, and inventory. The accounting tools help companies
organize and track their cost associated with different production processes, departments,
and/or products. This benefits the companies in which they can identify cost drivers and
implement cost control measures to optimize production process & efficiency.
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3. Inventory management: Most of the time, manufacturing companies have a significant
amount of investments tied up in inventory. With accounting, it helps manage the
tracking of inventory by establishing an inventory control. It helps identify the
slow-moving stocks, manage inventory levels, and calculate inventory turnover.
4. Budgeting and forecasting: It is important for manufacturing companies to have an
established process of managing budgeting and financial forecasting. This can help in
setting appropriate production targets, allocating of resources, and monitoring actual
performance against targeted figures. These tools allow a company to analyze “what-if”
scenarios to evaluate financial performance depending on different scenarios.
5. Streamlined process and efficiency: Accounting tools help automate various accounting
tasks such as data entry, calculations, and report generation. It reduces the need to
perform manual effort and minimizes the risk of inaccuracy in financial processes.
Readily available data can allow different departments to collaborate easily and
effectively.
6. Informed decision-making: Accounting tools make it possible to provide relevant
financial information to decision makers. The management can address the need for
making critical decisions by taking financial reports into consideration. In other areas,
manufacturing companies can also evaluate the profitability of new product lines, analyze
the feasibility of capital investments, or assess the impact of pricing decisions; these tools
offer valuable insights to aid in decision-making processes.
II.
Spin-Off Development Stages and Corresponding Proposed Accounting Tools
Vaquform’s spinoff projects go through four development stages: 1) Research &
Development (R&D); 2) Approval; 3) Execution; and 4) Evaluation.
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In the first stage, spinoff projects start out as research and development initiatives of
Vaquform Inc. As the project becomes more viable, it will undergo the approval process for
becoming a separate entity from the research and development team. Under the approval process,
information pertaining to the project’s funding, financial goals, costs, and profitability must be
determined. Once approved, the spinoff project will transition into execution. In this stage, it is
important that accounts are properly recorded in preparation for the next stage. In the evaluation
stage, actual accounts will be evaluated to determine the actual profitability of the project. This
will determine its financial impact to the mother company, Vaquform, and whether it will be
continued or not.
It is important that accounting information is properly recorded in all stages especially in
the Approval, Execution, and Evaluation Stages as the spinoff projects will function as segments
of the company. The table below shows the proposed key accounting tools that can be used for
the last three stages of the Spin-Off Development Process:
DEVELOPMENT ACCOUNTING TOOLS
STAGE
PURPOSE
1. Approval
1. Master Budget (Partial)
To identify costs and
2. CVP Analysis
profitability and the
capital allocation
needed.
2. Execution
1. Job Order Costing
To monitor sales.
2. Standard Costs and Variances
To adjust processes
and pricing strategies
in case U/F.
3. Evaluation
1. Budgeted Income Statement
To determine if the
2. Return on Investment
spin off or segment is
profitable.
Table 1. Key accounting tools that can be used by Yummy Molds.
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A. Approval Stage
a. Master Budget
The Master Budget is essential for planning and control of the
project. It takes into account assumptions to create sales, cash collections,
production, direct materials, direct labor, manufacturing overhead, selling
and administrative expenses, and cash budgets.
For the Sales Budget, it was assumed that the unit sales is 100 units
for July, 8 units for August, 300 units for September, 400 units for
October, 200 units for November, and 100 units for December for a total
of 1180 units for the latter half of 2023. The increase in sales for the
months of September and November are due to the demand for Halloween
and Christmas themed molds. Selling price per unit is at Php250.00
resulting in a total sales of Php295,000.00.
For the Cash Collections Budget, it was assumed that 50% of
monthly sales will be collected in the same month and 50% in the
succeeding month. This results to a total cash collection of Php282,500.00
for the latter half of 2023. With accounts receivable ending balance of
Php12,500.00.
For the Production Budget, it was assumed that the desired ending
inventory is 50% of the production needs for the succeeding month.
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For the Direct Materials Budget, it was assumed that the desired
ending inventory of raw materials is 100% of the production needs for the
succeeding month. The cost of raw materials per unit is Php100.00.
The Direct Labor Budget takes into consideration the production
budget and uses the required production units per month to compute the
cost of total direct labor hours. With direct labor cost per hour of
Php200.00 and 0.1hours per unit produced, the total direct labor budget is
Php23,600.00
The Manufacturing Overhead Budget takes into account the
production budget and computes the budgeted total Manufacturing
Overhead Cost of Php29,800.00 based on the variable manufacturing
overhead cost of Php10.00 per unit.
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The Selling and Administrative Expense Budget on the other hand
takes into consideration the budgeted unit sales and the variable selling
and administrative expenses per unit of Php10.00. This results in a total
budgeted S&A expense of Php41,800.00.
The Cash Budget takes into account all the budgets listed
beforehand and determines the total cash flows, and the borrowings or
financing needed per month. In the case of Vaquform and Yummy Molds,
this is one of the most important information that can be obtained from the
Master Budget as this can be considered as the amount of capital that
Vaquform needs to finance for Yummy Molds. For the cash budget, it is
assumed that the required cash ending balance is Php5,000.00 per month.
The borrowings needed per month are highlighted in yellow in the table
below.
b. Cost-Volume-Profit Analysis
According to Managerial Accounting by Garrison, et. al.,
“Cost-Volume-Profit Analysis helps managers make many important
decisions such as what products and services to offer, what prices to
13
charge, what marketing strategy to use, and what cost structure to
maintain.”
In this study, CVP analysis is used to determine the contribution
margin of each unit sale, break even point, target profit, and margin of
safety for Yummy Molds.
The table below shows the contribution format income statement
for yummy molds based on the budgeted sales units from the Master
Budget.
CVP Analysis can also be used to determine the breakeven point
for the 3rd to 4th quarter of 2023. Yummy Molds needs to sell 436 units to
reach breakeven or zero profit/deficit. Considering the Contribution
Margin Ratio of 0.44, the Peso Sales required to breakeven is
Php109,090.91.
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Based on the Total Budgeted Sales and Breakeven Sales of Yummy
Molds, the Margin of Safety is Php185,909.09.
In
order for Yummy Molds to reach target profits of
Php400,000.00, Php300,000.00, Php200,000.00, and Php100,000.00, a
total of 4073, 3164, 2255, and 1345 unit sales must be attained.
Computing the unit sales needed to attain target profit will help Yummy
Molds in determining how achievable each target profit amount will be.
B. Stage 2 — Execution
a. Job Order Costing
Job Order Costing can be utilized to ensure that Yummy Molds can
keep track of the actual costs incurred for each job. As a new venture,
there are risks associated with production which may lead to differences in
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actual and budgeted costs. Job Order Costing aids the business in
estimating the cost of the materials, labor, and overhead that will be
incurred while carrying out that specific job. Effective job order costing
enables businesses to generate quotes that are affordable enough to be
appealing to customers while maintaining a profit margin. Below is a
sample Job Order Costing sheet for Yummy Molds.
b. Standard Costs and Variances
Standard Costs and Variances can assist managers in locating areas
where costs need to be cut and determining the necessary steps to increase
profitability. Using the records from Job Order Costing sheets, variances
in actual and budgeted costs can be determined.
C. Stage 3 — Evaluation
a. Budgeted Income Statement
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The purpose of a Budgeted Income Statement is to provide a forecast on
the expected outcome of revenues and expenses and resulting in a profit or
loss of a specific period. It is based on a budget, which is a financial plan
that estimates the expected inflow and outflow of transactions. For the
budget income statement of Yummy Molds, it shows that there is a
significant loss incurred by the company in Q3. The factors which may
affect this is low sales revenue due to it being an off-peak season. Also,
there were a number of unavoidable expenses that the company has
incurred which led to a P27,200 loss. In Q4, the company had a better
position with a net income of P95,920. Since there are a number of
festivities celebrated on Q4—like Halloween & Christmas, the total
revenue increased by P55,000. This contributed to the overall net income
of the company of P71,984. With this information, the management can
make changes in the marketing approach for Q3 so that it will boost the
total sales revenue.
b. Return on Investment
By utilizing the actual financing incurred by Vaquform, and other
accounting records of Yummy Molds during the execution stage,
Vaquform’s Return on Investment for Yummy Molds can be calculated.
Determining the Return on Investment will help Vaquform decide whether
the spin off brand is profitable and is worth investing in moving forward.
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III.
Results
Results from the examination and use of managerial accounting tools to the Yummy
Molds example have been significant and have given important insights into the management
and financial performance of spin-off initiatives. These tools enable Vaquform Inc. to create
standardized control and monitoring processes for its spin-off initiatives, resulting in effective
resource management, cost control, and well-informed decision-making.
A number of management accounting tools have been identified to be essential for
developing control and monitoring procedures for Vaquform Inc.'s spin-off initiatives through the
analysis. These tools consist of:
a. Master Budget: The master budget offers a thorough financial strategy that
incorporates all pertinent data, such as sales projections, production costs, and
operational costs. Vaquform Inc. can set up a common control mechanism for
monitoring actual performance versus set goals by creating a master budget for
each spin-off project. This enables proactive management and the detection of any
anomalies or deviations that call for remedial action.
b. CVP analysis: CVP analysis aids managers in comprehending the connection
between expenses, volume, and profitability. Vaquform Inc. can establish the
breakeven point, weigh the effects of changes in sales volume or pricing, and
analyze the profitability of each project by using CVP analysis to spin-off
ventures. This application facilitates sound decision-making by illuminating the
financial ramifications of various scenarios.
c. Job Order Costing: For spin-off initiatives involving specialized or specific
orders, job order costing is especially important. Vaquform Inc. is able to
efficiently allocate resources, correctly track expenses, and determine the
profitability of each task by allocating costs to specific activities or projects.
Better cost control and the identification of cost drivers for future improvement
are made possible by this tool
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d. Standard Costs and Variances: While variations track the discrepancies between
actual costs and standard costs, standard costs indicate the anticipated expenses of
manufacturing goods or providing services. Vaquform Inc. may monitor and
assess the effectiveness of its spin-off projects by putting basic costs and
variances analyses into practice. Cost variations reveal potential inefficiencies or
opportunities for improvement, allowing for proactive cost management and
ongoing process improvement.
e. Budgeted Income Statement: Over a certain time period, the budgeted income
statement projects the anticipated revenues, costs, and profitability of a spin-off
project. Vaquform Inc. may evaluate the financial success of each project and
pinpoint areas that need improvement by comparing the actual performance to the
planned figures. This tool supports decision-making processes and aids in
assessing the overall financial impact of spin-off ventures on the business.
To properly employ the recommended control and monitoring techniques, some
minimum information needs to be determined from spin-off projects. This data consists of:
a. Sales and Revenue Data: The master budget, CVP analysis, and budgeted income
statement may all be created with the help of accurate sales and revenue data.
This data makes it possible to estimate sales volume, pricing options, and revenue
projections—all important factors in financial planning and performance
assessment.
b. Cost information: For job order costing, standard costs, and variations analysis,
comprehensive cost information, including direct materials, direct labor, and
overhead expenses, is required. It makes it possible to estimate project-specific
costs, identify cost drivers, and assess cost-effectiveness and profitability.
c. Project-specific
Financial
Goals:
Establishing
project-specific
financial
objectives, such as target profit margins or returns on investment, offers a
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standard by which to judge how well spin-off projects are performing. These
objectives provide a framework for decision-making and resource allocation, as
well as a more focused assessment of profitability.
Vaquform Inc. can use these accounting tools and techniques to gather the data required
to set up standardized control and monitoring procedures for spin-off projects like Yummy
Molds. Vaquform can effectively analyze expenditures, gauge profitability, make wise
judgments, and assess the financial performance of spin-off initiatives by applying these
solutions.
Overall, the results illustrate the relevance of applying management accounting
techniques in the different stages of spin-off project development. Vaquform Inc. may make
data-driven decisions, manage costs, optimize efficiency, and streamline processes with the use
of these tools to successfully execute and evaluate spin-off projects.
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RECOMMENDATIONS & CONCLUSIONS
I.
Recommendations
The following recommendations are made in light of the case's analysis and results:
1. Developing and implementing standard managerial accounting procedures that are
adapted specifically for spin-off ventures is something Vaquform Inc. should do. All
phases of the creation of a spin-off project, including research and development,
approval, execution, and assessment, should be covered by these procedures. Vaquform
Inc. can guarantee adequate planning, monitoring, and control of spin-off projects by
putting standardized procedures in place.
2. Utilize Recommended Accounting Tools: For each step of the development of the
spin-off project, Vaquform Inc. should make use of the recommended accounting tools
outlined in the study. The master budget, cost-volume-profit (CVP) analysis, job order
costing, standard costs and variances analysis, and budgeted income statement are a few
examples of these instruments. Vaquform Inc. is able to effectively monitor costs, gauge
profitability, make wise judgments, and measure the financial success of spin-off ventures
by employing these tools.
3. Collect vital Information: Vaquform Inc. must collect vital data from spin-off initiatives
in order to fully use the suggested processes and accounting tools. Accurate sales and
revenue data, thorough cost data (direct materials, direct labor, and overhead expenses),
and project-specific financial objectives are all included in this data. By gathering this
data, Vaquform Inc. will be able to make data-driven decisions, realistic budgets, and cost
and profitability analyses.
4. Reduce Learning Curve and Ensure Effective Implementation by Simplifying Accounting
Tools: Given that Vaquform Inc. is mostly made up of designers and engineers, it is
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advised to simplify some of the managerial accounting tools. This could entail giving
clear instructions, templates, and instructions on how to utilize the tools efficiently.
II.
Conclusions
The report concludes by emphasizing the significance of creating standardized
managerial accounting methods for Vaquform Inc. Vaquform Inc. may successfully plan,
monitor, and control spin-off initiatives by making use of suggested accounting tools and
acquiring crucial data. This improves resource management, cost control, and decision-making.
The analysis's findings show the value and advantages of using management accounting
methodologies at various phases of the development of spin-off projects. Vaquform Inc. may
improve overall performance and succeed in its mission to become a leading provider of
vacuum-forming technology by putting the recommendations into practice.
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