Team Homework for Week Four
June 25, 2007
A) What might be the implications of reducing each of the costs by 10% to compensate for reduced sales?
Direct Materials (Budgeted for $240,000)
Reducing direct materials can be a big risk. This could make or break a company. The idea of forecasting is simply a guess of the present trends compared to years past. If materials were reduced and suddenly the next month there is a steep increase in sales, the company would not be ready to accommodate the demand because it doesn’t have enough inventories in stock. Instead of saving money, the company could lose three to four times the amount they had hoped to originally save.
Direct Labor (Budgeted for $110,000)
Once again, if the company cuts costs in this department – which would be laying off workers – and the sales climb suddenly – there would be no workers to help produce the sales demands and the company would have to scramble to hire employees back or even have to hire new employees which could slow production down dramatically as the new employee would first have to be trained and the employee make work slowly until they gain experience. The moral of the employees would also be weak, since getting laid-off or having to live with a reduction in hours – employees may feel insecure in their jobs.
Insurance (Budgeted for $50,000)
Insurance being reduced would be unwise – should the company production rise and an incident occur the company would not have the proper coverage in insurance. This should not be reduced.
Depreciation (Budgeted for $90,000)
Reducing depreciation may not help much unless the depreciation method that the company adopted is either changed or the entire cost of the equipment is accounted for in one budget year. Another option may be trying to extend the depreciation another year, would it save money and would the equipment last another year without putting a...