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Investor Report for Texture Company
[Your Name]
Southern New Hampshire University
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Table of Contents
1.0 Introduction ............................................................................................................................... 3
1.1 Purpose .................................................................................................................................. 4
1.2 Methods and Approach ......................................................................................................... 4
2.0 Financial Strategy ..................................................................................................................... 6
2.1 Costing System ...................................................................................................................... 6
2.2 Selling Prices ......................................................................................................................... 7
2.3 Contribution Margin .............................................................................................................. 7
2.4 Target Profits ......................................................................................................................... 8
3.0 Financial Statements ................................................................................................................. 9
3.1 Statement of Cost of Goods Sold .......................................................................................... 9
3.2 Income Statement .................................................................................................................. 9
3.3 Variances ............................................................................................................................. 10
3.4 Significance of Variances.................................................................................................... 11
Direct Labor Rate Variance ................................................................................................... 11
Direct Labor Efficiency Variance.......................................................................................... 11
Direct Materials Price ............................................................................................................ 11
Direct Material Quantity Variance ........................................................................................ 12
4.0 References ............................................................................................................................... 13
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1.0 Introduction
The organization is called Texture Clothing Company. Texture Company started as a
clothing processing company. The business raises the process of distributing collars, leashes, and
harnesses products to customers. The business's future vision is to be the most trusted brand in
the clothing industry through its provision of quality and safe clothing products to customers on
a global scale. The company strives to continue building on its legacy of offering nutritious and
high-quality clothing products while widening to capture new markets and establishing
innovative services and products that meet the dynamic customer demands. The organization
strives to attain this goal by practicing sustainability, clothing safety, animal welfare,
commitment, and innovation to offer the best clothing quality and beauty standards.
Texture Company mainly focuses on establishing value for consumers, employees,
stakeholders, and the business community. In the next five years, Texture Company will be the
leading clothing market player. It will have a solid portfolio of clothing products that attract
customers seeking more sustainable, quality clothing. Texture Company will also expand into
international markets, especially Latin America and Europe, where demand for collars, leashes,
and harnesses grows rapidly. In the coming ten years, Texture Company will fully integrate into
a completely sustainable clothing company leading in innovation and environmental
stewardship. The organization will remain at the top by prioritizing these values. It will continue
offering consumers and customers the most required clothing, products, and services.
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1.1 Purpose
This report aims to inform Texture Clothing's financial performance over the past first
month of its operations. It explains the costing strategies that were used to attain the
performance. It reviews the original business strategies, shows the financial performance through
financial statements, outlines the labor variance, and explains its significance to the investors.
The information in this report is essential and needs close attention since it communicates facts
and figures that can enable stakeholders and investors to examine the business performance
against the budgets and projected costs. Similarly, it enables investors and stakeholders to
understand different managerial accounting techniques implemented to make strategic decisions
for Texture Clothing.
Finally, the information in the report serves as a reference that investors and stakeholders
can use to decide on the business plan and budgeting in the future. This report is critical for
getting insight into Texture Clothing's financial health after its first month in operation.
Therefore, investors can understand business prospects for future success and growth.
1.2 Methods and Approach
Texture Company adheres to the AICPA code of ethics and industry standards when
preparing financial statements to ensure that the business provides reliable, accurate, and
consistent financial information (Frazer, 2020). The company used management accounting
techniques such as job order costing, cost-volume-profit analysis, and variance analysis to
generate and present the financial information in this report.
This report uses the job order costing method, which is suitable for the company since it
produces customized products. It also enables the organization to allocate costs to every product
depending on its distinctive features and production requirements. The job order costing method
allows Texture Company to accurately monitor costs for every product and job finished during
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the first month of business operations. Secondly, cost-volume-profit (CVP) analysis is suitable
for Texture Company since it determines the business selling prices and contribution margins for
every product (Sorin & Carmen, 2010). The business uses the method to calculate its break-even
point foreign.
Texture Company uses Cost-volume-profit (CVP) method to know the contribution
margins and selling prices of harnesses, leashes, and collars per unit. While using CVP, the
business calculates the sales level required for the break-even point to obtain the desired profit.
Therefore, the CVP method enables Texture Company to determine selling prices that cover the
costs and contribute to the business profits. Lastly, this report implements variance analysis to
identify and analyze differences between expected and actual costs. The business uses this
method to examine the direct labor performance and performance of material costs to recognize
the areas where it can reduce costs and improve efficiency.
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2.0 Financial Strategy
2.1 Costing System
Texture Company uses a job order costing system to assist in the business costing
strategy. The job order costing method involves the allocation of costs to every individual job,
order, and product depending on their distinctive features (Hansen et al., 2021). The job order
costing method works well for Texture Company since the business produces different products
with distinctive and varying production processes. Therefore, the system allows the business to
assign costs to every product accurately.
From the job order costing method, Texture Company can acquire more accurate cost
information about each product for pricing decisions. Since Texture Company offers products
that vary in production process and complexity, the job order costing technique allows the
business to accurately assign costs to every job to ensure the correct pricing of products (Drury,
2013). The business team can easily monitor costs at every production stage and acquire valuable
information to help reduce costs or improve processes. On the other hand, other costing methods
such as activity-based and process costing are better suited for businesses that process similar
products and encounter complex production processes with multiple activities.
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2.2 Selling Prices
The following are the established selling prices for the products:
Leashes: $22
Collars: $20
Harnesses: $25
These are competitive prices in the market for similar products. These prices are suitable because
they are high enough to cover the cost of production on each product and generate the desired
profit.
In the conducted cost-volume analysis, every product's minimum selling price should be
at least $10 to cover the production cost. However, each product is supposed to sell for at least
$15 to make a profit. For example, a selling price of $20 is suitable for collars since it is above
the production cost and also competitive in the market. In comparison, the selling price of each
leash goes for $22, which is a competitive price in the market. Lastly, harnesses have a selling
price of $25 per unit to make a profit and remain competitive in the market.
2.3 Contribution Margin
No
Product
Selling price
Variable cost
Contribution margin
1
Collars
$ 20.00
$9.10
$10.90
2
Leashes
$22.00
$12.10
$9.90
3
Harnesses
$25.00
$14.60
$10.40
The contribution margin is calculated by subtracting the variable cost from the selling price.
o Contribution margin = selling price – variable cost
It represents the income available to cover the fixed costs and generate profit.
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For instance, the contribution margin for collars is $10.90 because $20.00 - $9.10 = $10.90. It
tells the amount of money the company makes on each product. This information helps in
deciding on pricing, marketing, and production.
2.4 Target Profits
The table below shows a breakeven-analysis of the products
Break-Even Point = (fixed costs + target profit) / contribution margin
No
Product
Fixed costs
Target profit
Break-Even Units
1
Collars
$4,028
$300
397
2
Leashes
$4,028
$400
447
3
Harnesses
$4,202
$500
542
The break-even point is different for every product because the variable cost, sales prices, and
fixed cost for each product are different due to the uniqueness of each product.
The chosen target profits are achievable with the available marketing plan, and once achieved,
these profits can make the company grow.
For collars, the target profit of $300 is realistic and attainable when selling collars at $20 per
unit. The same with leashes when selling them at $22 per unit to attain a target profit of $400.
Furthermore, lastly, selling each unit of harnesses at $25 to make a target profit of $500.
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3.0 Financial Statements
3.1 Statement of Cost of Goods Sold
No
Product
Quantity Sold
Unit Cost
Total Cost
1
Collars
460
$9.10
$3,640
2
Leashes
500
$12.10
$6,050
3
Harnesses
400
$14.60
$5,840
Total
$16,076
The actual cost of goods sold in the first month was $16,076, slightly higher than the budgeted
cost of goods sold of $15,000. The difference was brought by the slight increase in the cost of
raw materials over the originally expected price due to increased demand for the same raw
materials. The overall business performance against the benchmarks is pleasing. The business
can continue generating more profit while controlling costs by negotiating lower prices with
suppliers, reducing waste during production, and increasing sales volumes.
3.2 Income Statement
Revenue
COGS
Gross Profit
Operating Expenses
Net Income
$24,000
$16,076
$8,470
$5,000
$2,924
The net profit for the first month is $2,924, which is higher than the budgeted $1,200. The
difference in profit arises due to increased sales than the budgeted sales. The business performed
well against the benchmark put in place.
The business is confident to continue controlling its costs and generating profits.
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3.3 Variances
Direct Labor Rate Variance = (Actual rate – standard rate) x actual hours
Direct labor efficiency variance = (actual hours – standard hours) x standard rate
Direct materials price = (actual price – standard price) x actual quantity
Direct material quantity variance = (actual quantity – standard quantity) x standard price
Direct Labor Time Variance
Direct Labor Efficiency Variance
Direct Material Price Variance
Direct material Quantity Variance
Actual Hours Expected Hours
16.5 hours
16.0 hours
Actual Hours Standard Hours
180
160
Actual price Standard Price
$10.00
$9.10
Actual Quan. Standard Quan.
460
400
Standard Rate
$180.00
Standard Rate
$16.00
Actual Quantity
460
Standard Price
$9.10
Variance
$90
Variance
$1,280
Variance
$220
Variance
$224
From the calculations above, the actual labor cost was above the standard cost, and the actual
cost of materials was more than the standard cost. The direct labor time variance was higher than
expected, while the direct labor efficiency variance was lower. Similarly, the direct material
price variance and material direct material quantity variance were higher than expected.
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3.4 Significance of Variances
Here is the summary of the variance analysis:
No
Variance
Significance
Favorable or Unfavorable
1
Direct Labor Time Variance
$90
Unfavorable
2
Direct Labor Efficiency Variance
$1,280
Unfavorable
3
Direct Material Price Variance
$220
Unfavorable
4
Direct material Quantity Variance
$224
Favorable
Direct Labor Rate Variance
The unfavorable direct labor rate variance made the company pay more for labor than
expected. The wage increase, fluctuating production process, or change in employee mix led to
high labor costs. The company should standardize labor costs and wages by training employees
and retaining an affordable workforce. The company should also avoid employee mix to ensure
employees work effectively and efficiently toward producing collars.
Direct Labor Efficiency Variance
The Unfavorable direct labor efficiency shows that the company utilized more labor
hours than budgeted to produce a similar quantity of products. Factors like an inexperienced
workforce, fluctuating production processes, and variations in material qualities promoted the
results. Therefore, the company should ensure that it recruits competent and skilled employees,
design a standard production process for the collar products, and establish quality assurance
standards to ensure that the quality of materials used in processing is expected.
Direct Materials Price
The unfavorable direct material price show that the company paid more for materials to
make collars than budgeted. An increase in the cost of raw materials for collars, variations in
material suppliers, and change in the purchased quantity of collars materials led to the higher
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direct material price for collars. Therefore, the company should seek materials from suppliers
offering the same quality at lower prices. It is difficult to avoid purchasing materials from
different sellers in a dynamic market with changing prices, but the company should purchase
materials from one stable supplier with sustainable prices for collar materials.
Direct Material Quantity Variance
The favorable direct material quantity variance show that the company utilized fewer
materials than expected to manufacture a similar number of collars. Efficient utilization of
materials, adoption of better production processes, and positive variation in material quality
contributed to the lower direct material quality variance. The company must retain or improve its
efficiency when using the material to create a better variance than this on collars.
Unfavorable variances mean the company experienced higher actual costs than the
budgeted ones (Helms & Weiss, 1986). Several factors, such as the increase in labor costs,
material costs, and overhead costs, led to unfavorable variances. The company is establishing
various means to correct these errors. These variances have small sizes, which reduces their
significance in the business profitability and future survival. As of now, the variances do not
cause the company any major problems since the company is still profitable. Therefore, the
company's decision for the next month is to reduce the variances by reducing production costs to
increase revenue.
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4.0 References
Drury, C. M. (2013). Management and cost accounting. Springer.
Frazer, L. (2020). Does internal control improve the attestation function and, by extension,
assurance services? A Practical Approach. Journal of Accounting and Finance, 20(1),
28–38.
Hansen, D. R., Mowen, M. M., & Heitger, D. L. (2021). Cost management. Cengage Learning.
Helms, G. L., & Weiss, I. R. (1986). The cost of internally developed applications: Analysis of
problems and cost control methods. Journal of Management Information Systems, 3(2),
5-21.
Sorin, B., & Carmen, S. (2010). Cost volume profit model, the break-even point, and the
decision-making process in the hospitality industry. Annals of the University of Oradea,
Economic Science Series, 19(2).