<NAME OF THE STUDENT>

April 14, 2018

Sub: Briefing on Budgets and Recommendations for Strategic Planning using Financial

Statements

Dear CEO

I feel delighted to have been given opportunity to prepare the report presenting the snapshots of

the projected financial statements and other reports that supplement in decision making process

at the strategic level by the senior management.

In the second part of our application of the financial statements, the starting point was calculation

of ending finished goods as per Absorption costing and Variable costing. The terms “Absorption

Costing” and “variable costing” would be used too often in the report as the former is more

concerned with accounting aspect of various calculations while Variable costing is used for

decision making purposes and forms basis for reports like contribution margin, cost composition

of the product vis-à-vis selling price and breakeven analysis. Variable costing uses only variable

costing for arriving and calculating costs while absorption costing also includes fixed costs in ts

costing.

There is lot of difference in the amount of cost of goods manufactured as per absorption costing

and variable costing. The cost of goods manufactured as per absorption costing is $71.23 million

while it is just $66.37 million as per variable costing. Similarly, this has its impact on the cost of

goods sold which is one of the critical elements in the calculation of profitability. In our next

calculation, the profit before taxes is calculated as per absorption costing as well as variable
<NAME OF THE STUDENT>

costing. Below is the summarized table that shows the difference between absorption and

variable costing.

Absorption Variable
Costing Costing
Finished Goods Inventory 6,580,591 6,132,000
Cost of Goods Manufactured 71,234,900 66,378,900
Cost of goods sold 64,654,309 60,246,900
Income Statement 13,362,577 12,467,454

The numbers in absorption costing are always more than the variable costing as it also includes

fixed costs which is irrelevant in variable costing. However, the profit of Absorption costing is

only used in balance sheet preparation.

The asset side of the balance sheet is comprised of Current assets and Non-current assets and

similarly liabilities consist of only accounts payable (current liabilities) and shareholder’s equity.

The non – current assets comprising of business’s plant and equipment are shown as net of

depreciation. Looking at the Balance sheet, the business is based on a very simple model where

all of the fixed assets are financed by the equity and there is no outside liability or external

financing taken by the business. Though it is good for the firm in the initial years of business, the

company should cautiously take some external financing to take advantage of capital leverage.

Next is the projected cash flow statement and as explained above, the overall model of the

business is very simple and do not have any investing activity (sale or purchase of fixed assets)

and financing activity (payment of any dividend or interest or raising fresh capital). There is only

cash generated from operating activities which adds up to the final cash balances at the end of

the year. This is not a advisable situation as the cash flow statement indicates that despite having

extra cash, the firm is neither using the same for expansions purposes nor for any financing
<NAME OF THE STUDENT>

activity like payments of dividend to make shareholders satisfied and increasing their wealth.

The business must find a way to use its surplus cash from operations to increase their

profitability and attain sustainability in near future.

One of the most important calculations is breakeven point. The total Fixed Cost of $5,796,000

and contribution margin per unit of $117.60, business require 49,286 units to break even. After

this point, every other unit would bring profit for the business. At the production level of

173,200 units, the total budgeted cost is $71.24 million dollars along with fixed production cost

of $4.856 million.

Regards