Budgets Forecast for Energy Drink Company - Essay Example
Marginal costing takes into account variable costs during production while Fixed manufacturing overhead is treated as period costs. It is believed that only the variable costs are relevant to decision-making and that the reason why they are considered in production. Fixed manufacturing overheads will be incurred regardless there is production or not.
Appendix 1 illustrates a cost statement using marginal costing. The contribution margin is positive; therefore the plan of manufacturing an energy drink is a viable one. The fixed costs are not useful in the decision-making process that is why contribution margin is used as it excluded fixed costs.
Break-even analysis is used in showing the relationship between selling prices, sales volume, variable costs, fixed costs and profits at various levels of activity. It is also referred to as cost-volume-profit analysis. It used in determining the break-even point. BEP is the level of activity where the total revenue equals the total costs. Therefore, no profits are realized at the BEP.
However, break-even analysis has its limitations. To begin with, breakeven analysis assumes that fixed cost, variable costs and sales revenue behaves are linear. However, this is not the case since some overhead costs may be stepped in nature. As a result, the straight sales revenue line and total cost line tend to curve beyond a certain level of production
Another limitation of break-even analysis is that it assumes that all the stock produced is sold. Therefore, changes in stock levels are not taken into account in the breakeven chart. Finally, breakeven analysis is only suitable for providing information to relatively small companies that produce one type of products. Thus itâ€™s not suitable for companies producing a different product.
Forecasting is used in estimating future performance of the business. It is useful in the financial planning process which entails assessing future financial needs.
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