Introduction
Merci refers to the finest Assortment of Chocolates made in Europe, and it is a brand that offers the best method of showing heartfelt gratitude. Markedly, Merci is a brand of Storck. Fine ingredients are used to make the delicious European chocolates thus they offer variety and indulgence. The flavors of the chocolates include Dark Cream, Cream Truffle, Praline-Crème, and Hazelnut-Almond. The idea of Merci was introduced in 1965, and it won over many people because it was the first gift to be wrapped individually in Germany. Currently, Merci is sold in more than 100 countries. This paper provides the cost estimates and the budget of introducing Merci Brand in the USA. Specifically, the account analysis is used to provide the cost estimates whereas the zero-based budgeting methodology is used to provide the budget.
Cost Estimation
The accounts analysis method is instrumental in identifying cost behavior because it distinguishes between fixed and variable costs. The method entails distinguishing between the variable and fixed costs thus it calls for subjective insights and judgment (Bennett Stefan and Dimitar 60). Accounts analysis method can be used to estimate the costs of Merci brand on condition that the cost data for a previous period is known. Accordingly, the approach examines costs and categorizes them as either variable or fixed costs (Garrison 792). Markedly, the fixed costs do not vary depending on the activity levels or the production levels. On the other hand, the variable costs vary depending on the level of activity. After the categorization of the costs, the sum of the variable costs is obtained, and the variable cost for every unit is determined by dividing the total variable costs with the total number of units. The equation below shows how the variable cost for every unit is obtained as explained by Bennett, Stefan, and Dimitar (59).
Variable Cots per Unit= Total Variable Costs
Total Number of Units
The variable cost for every unit is introduced in the cost formula as the VC (Variable Cost). The total sum of the fixed cost is obtained separately, and it is used to compute the TFC (Y-intercept). The Variable cost and the y-intercept are used to estimate the costs that may be incurred in the future period (Garrison 793).To illustrate the concept of accounts analysis methodology, assume that the units of Merci produced and sold in the USA in the first period are 500 the material used in the production of the Merci chocolates are worth $1800, the labor utilized in the production of the chocolates is $800 and the production facility costs are equivalent to $300.
The information about the cost is provided in Table 1 below.
Source: Author
A breakdown of the variable and fixed cost is provided in Table 2 below.
The total fixed cost is $300 whereas the total variable cost is $2,600. The variable cost per unit is obtained by dividing $2,600 by 500 units, and it is equivalent to $5.2. The equation that can be applied when estimating the cost is Y= $300,000+ $5.2 X. The equation can be used to estimate the production costs (Y) as long as the units of Merci (X) are known in advance. For example, if the company intends to produce and sell 600 units of Merci in the second month, the total costs of production will be equivalent to $ 300 + (5.2 x 600 Units) =$ 3420. Similarly, if the target production capacity is 700 units of Merci chocolates, the total cost of production will be equivalent to $300 + (5.2 x 700 units) = $ 3940.
Budgeting
The budget associated with the introduction of Merci brand will be formulated using the zero-based budgeting methodology. It is imperative to note that under this methodology, the managers justify the budgeted expenditures instead of the common approach that requires them to justify the incremental changes in a budget. Accordingly, the managers have expenditure baselines of equivalent to zero (Maturi 70).As such; the managers that will be in charge of introducing the Merci brand in the USA will have minimum funding for the basic operations of the various departments. Additional funding associated with the brand will be justified sufficiently. The process flow that will be implemented under zero-based budgeting will encompass identification of business objectives, creation, and evaluation of methods that will aid in the accomplishment of the objectives, evaluation of the funding levels and setting of priorities (Maturi 70).
It is noteworthy that the zero-based budgets do not have links with budgets in the previous years hence existing expenditures cannot be embedded in the cost base. Also, spending cuts and increases are not spread evenly in the budgets; hence, zero-based budgeting eliminates the “sandbagging” tendencies that are common in other budgeting methodologies (Hansen 289). Evidently, Zero-based budgeting allows the strategic allocation of funds and resources. The budgets will be tied to specified activities thus spending targets will be aligned with the functions of particular activities. Furthermore, funding will be targeted to the activities that will align with the organizational strategy (Maturi 70).
Notably, zero-based budgeting will enable the managers to carry out alternative analyzes, and this will help them to determine the alternative methods that will be used to produce the Merci brand. Specifically, they will consider whether to outsource the Merci Ingredients or to manufacture them. It is noteworthy that the method will minimize cases of budget inflation because any changes in the original budget will be spotted easily (Hansen 299). In addition to that, non-key activities associated with the introduction of Merci will be eliminated because the zero-based budgets will focus on the critical activities. The activities associated with the Merci brand will be linked to all the expenditures thus; the mission of launching the brand in the USA will be focused. The adoption of the zero-based budgeting methodology will ensure that there is a regular review of all the process that is associated with the launch of the brand. Furthermore, the funds will be directed to activities that will help in the attainment of the organizational objectives and mission (Hansen 300).
However, the zero-based budgeting methodology will be disadvantageous to some extent because a lot of efforts will be needed to investigate all the departmental activities associated with the brand. There will be bureaucratic procedures because budgets will be prepared from scratch every year. The zero-based budgeting methodology will require a lot of management time. Furthermore, the management teams will not have sufficient time to revise the budgets continuously in a bid to make them competitive in particular situations (Hansen 312).
Conclusion
Works Cited
Bennett, Martin, Stefan Schaltegger, and Dimitar Zvezdov. "Environmental management accounting." Review of Management Accounting Research, S (2011): 53-84.Print.
Garrison, Ray H., et al. "Managerial accounting." Issues in Accounting Education 25.4 (2010): 792-793.Print.
Hansen, Stephen C. "A theoretical analysis of the impact of adopting rolling budgets, activity-based budgeting and beyond budgeting."European Accounting Review 20.2 (2011): 289-319.Print.
Maturi, Richard J. "Zero-Based Budgeting." Home Business Magazine: The Home-Based Entrepreneur's Magazine 16 (2009): p70-70.Print.
