Report for [Company Name]

Introduction

Lease Are Us is a business venture that deals in the sale of pet accessories. Lease Are Us focuses
primarily on three items which are harnesses, leashes, and collars. These accessories are essential
in the modern-day world of petting. These accessories provide important benefits such as
preventing injury to the pets, keeping control, and preventing injury to other people.
Over the next few years, the organization’s vision is to have expanded operations to at least 5
more locations within different states in the United States. The long-term vision is to become a
net exporter for harnesses, leashes, and collars.
Purpose
The purpose of this report is to provide financial information to secure potential funding from
investors. This report is an analysis of the organization’s financial plans to determine the
profitability of the business venture and how it conforms to the AICPA code of ethics. The report
considers several financial metrics such as the fixed and variable costs for each of the products,
contribution margin analysis, break-even analysis, cost of goods sold computation, an income
statement and variance analysis of the actual and budgeted costs of labor and materials. The
information provided here is essential because the financial metrics provide data that the
organization will rely on when making critical decisions about its future financial performance
Methods and Approach
This investor report has incorporated cost accounting techniques. Cost accounting
involves attributing direct and indirect variable and fixed costs to the manufacturing and
production process. Cost accounting is an essential process that determines the ability of
businesses to control costs. While many businesses want to perform at the least cost possible,
cost control also involves increasing some costs if they achieve some other form of efficiency

Report for [Company Name]
that overrides the increase in costs such as an increase in profitability by an even bigger margin
(Albahaca, 2018). This analysis equips the business owners with such information that they need
to make decisions on where and how to control costs. Cost analysis also determines the
profitability of a business venture. By comparing startup costs against the expected revenues,
investors can have a clearer picture that the organization is headed. Some financial ratios have
been considered, and the breakeven analysis has also been computed. Break-even analysis
provides entrepreneurs with insight into the number of units that they need to sell to recover the
fixed and variable costs and meet their desired profit levels.
The computations and analysis have been done in consideration of the AICPA code of
ethics. The code guides the behavior of CPAs and requires that they act with the values of
integrity, passion, innovation, and collaboration. There are 6 principles that AICPA requires
professionals to conduct themselves with. The principles are responsibility, public interest,
integrity, objectivity and independence, due care, and the scope and nature of services principles
(Baranek & Kinory, 2020).

Financial Strategy

Lease Are Us uses a job-order costing method as its primary costing strategy for its
products. Job order costing is defined as the costing method that attributes the manufacturing
cost to each product. The job order costing method is applicable where the organization
manufactures products that are different from each other and therefore require job-specific
costing methods (Ogungbande et al., 2020). Additionally, the nature of the business may require
specialized and personalized products. The organization also considers the different types and
sizes of pets, and in conjunction with the different tastes and preferences that customers have, the
job order costing method is the most ideal for this business. The job order costing method was

Report for [Company Name]
also selected for its efficiency in determining the profitability of the venture (Maliki et al., 2020).
Through this method, the organization was able to estimate the different costs in materials and
labor and therefore design profit margins that meet the organization’s profit objectives.
Selling Prices
The organization’s selling prices have been listed below.
 Collars $20
 Leashes $25
 Harnesses $30

The costs have been arrived at in consideration of the market research data. The data shows that
pricing the collars at $20 would increase the expectation to sell 30 collars per day. Pricing the
leashes at $26 dollars, one can expect sales of 23 leashes per day, and pricing the harnesses at
$30 can fetch sales of 22 harnesses per day. These prices are based on current market research
and may change depending on the changes in the market and changes in the business
environment. The selling prices have also considered the organization’s contribution margin,
which has been discussed in detail in the next section. Since the proprietor’s plan to expand
operations into other states, it is more likely that increased business will lead to increased
revenues, and the business will enjoy economies of scale, which it can use to reduce the prices.
Contribution Margin

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COLLARSLEASHESHARNESSES
Sales Price per Unit20.00$ 25.00$ 30.00$
Variable Cost per Unit10.20 13.20 17.20
Contribution Margin9.80$ -$ 11.80$ -$ 12.80$

The above table represents the contribution margin based on the sales price that the organization
has set. The contribution for collars, leashes and harnesses is $9.8, $11.80 and $ 12.80 per unit
sold. Using the contribution margin ratio formula, (contribution margin/revenue per unit), the
ratio for the collars, leashes and harnesses can be expressed as follows 49%, 47.2% and 42.67%.
This contribution margin is adequate and provides an acceptable safety net for meeting the other
expenses and providing an acceptable profit for the investors. The contribution margin has been
arrived at after considering the fixed cost per unit.

Target Profits

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Milestone Two – Break-Even Analysis

COLLARSLEASHESHARNESSES
Sales Price20.00$ 25.00$ 30.00$
Fixed Costs3,545$ 3,970$ 3,990$
Contribution Margin9.80$ 11.80$ 12.80$
Break-Even Units (round up)362 336 312

Target Profit300.00$ 400.00$ 500.00$
Break-Even Units (round up)392 370 351

Target Profit500.00$ 600.00$ 650.00$
Break-Even Units (round up)413 387 363

The above table is a demonstration of the breakeven analysis. A breakeven analysis usually
considers the number of units that an organization has to sell in order to meet its fixed and
variable costs. From the above table, the breakeven units for the collars, leashes, and harnesses
are 362,336 and 312 units, respectively. This means that once the organization has sold 362
collars, it has recovered the fixed and variable cost per unit.
Besides a cost analysis, a breakeven is used to compute operational risk. Operational risks affect
organizations that have high fixed costs. The risk is that organizations that have high costs have
to maintain high levels of revenues in order to be able to meet fixed costs. For example, the fixed
costs for the production of collars are $3545. Operational risk is presented using the breakeven

Report for [Company Name]
units. Therefore, the metric that the organization must sell 362 collars to break even is a measure
of its operational risk. The higher the fixed cost, the higher the operational risk. Moving forward,
the organization may look at ways to reduce fixed costs in order to reduce operational risk.
From the table, the organization would have to sell 392, 370, and 35 units in order to achieve
profits of $300, $400, and $500 from the sakes of collars, leashes, and harnesses. The
organization would additionally have to sell 423, 387, and 363 units of collars, leashes, and
harnesses to achieve profits of $500, $600, and $650 units, respectively.

Financial Statements

Cost of Goods Sold
Materials: Beginning0
Add: Purchases for month of January20,000$
Materials available for use20,000
Deduct: Ending materials5,000
Materials Used 15,000$
Direct Labor7,500
Overhead4,005
Total Costs26,505$
Deduct: Ending Work in Process Inventory0
Cost of Goods Sold26,505.00$

The table above is an analysis of the cost of goods sold. The cost of goods sold determines how
much gross profit the business makes. From the analysis, the cost of sales amounts to $26,505,

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which is a combination of material purchases, direct overheads, and direct labor. Direct labor
includes the salaries of the collar maker, harness maker, and leash maker.
Income Statement
Milestone Three – Income Statement

Revenue:
Collars10,000$
Leashes15,000
Harnesses19,500
Total Revenue:44,500$
Cost of goods sold26,505
Gross profit17,995$
Expenses:
General and administrative salaries2,400$
Depreciation140
Rent540
Utilities and insurance1,800
Scissors, thread, and cording900.00$
Loan450
Total Expenses6,230.00$
Net Income/Loss11,765.00$

The table above represents the income statement. It compares the income from the sale of the
products with the cost of goods sold and other general and administrative expenses to determine
the profitability. From the analysis above, the company expects to make an $11,768 profit. The
revenues have been derived from the assumption that the sales will be 500 units of collars, 600
units of leashes, and 650 units of harnesses. General and administrative expenses include general
salaries, depreciation, materials, and loan repayment. It is essential to note that depreciation is
expensed as a provision. It could help the organization to reduce tax liability. The statistics from

Report for [Company Name]
the first month of operations indicate that the organization was able to meet its profitability
objective. This is essential because it communicates that the industry that the business operates
in is prime. It is essential to note that the organization has been able to achieve this without
having to invest in any marketing activities so far. This is notable and provides further evidence
of the potential success that the organization could encounter. The profits reported in the first
month of operations align well with the organization’s vision. Through the retained earnings and
the seed finance received from investors, the organization can plan for the future expansion plan.
It is also the most common metric that investors consider. Investors aim to maximize their rate of
returns or profits.
Variances

Data for Variance Analysis:
Budgeted
(Standard)
Hours/Qty

Budgeted
(Standard)
Rate

Actual
Hours/Qty

Actual
Rate

Labor200 16.00$ 220 18.00$

Materials600 9.10$ 650 12.00$

Variance analysis is an essential tool that businesses use to identify differences between the time
taken to complete processes and the differences in materials. This is an essential tool because it
helps businesses control costs and therefore be in better control of their profits. The above table
shows the difference in variances for collars. The budget for materials was $ 600. However, the
organization ended up spending $650. This shows that there was a difference of $50 in material
costs.

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The organization also budgeted for 200 labor hours but ended up spending 220 labor hours,
showing a difference of 20 hrs. The essence of budgets, besides controlling costs, is that it helps
organizations to plan for their resources.
Significance of Variances

Variances for Collar Sales

Variance

Favorable/
Unfavorable

Direct Labor Time Variance
(Actual Hours – Standard Hours) x Standard Rate320.00$ Unfavorable
Direct Labor Rate Variance
(Actual Rate – Standard Rate) x Actual Hours440.00$ Unfavorable
Direct Materials Quantity/Efficiency Variance
(Actual Quantity – Standard Quantity) x Standard Price455.00$ Unfavorable
Direct Materials Price Variance
(Actual Price – Standard Price) x Actual Quantity640.00$ Unfavorable
The table above shows the variance analysis for collar sales. There were unfavorable
variances in labor time, labor rates, direct materials, and direct price. This shows that the
organization needs to identify the causes of the variances to become more profitable and more
competitive.
The difference in variances could be explained by the differences in prices. When
organizations make their budgets, they base their information on market prices. Over time,
market forces may lead to a shift in prices. The organization relies heavily on purchases, and as
such, differences in prices may cause significant and unfavorable variance indirect materials
price variance. A difference indirect labor rate variance may be explained by a demand for better

Report for [Company Name]
wages by employees. Organizations plan for labor based on market estimates. These estimates
change based on the availability of work and the level of skill required.
An unfavorable variance indirect time could mean that there are unforeseen inefficiencies
that cause the organization to spend more time than it would normally do. This could be due to
the organization using obsolete technology or delays such as in deliveries of raw materials.
Either way, organizations need to identify the causes of such inefficiencies since they have
financial implications.
One way that organizations can benefit from such an analysis is by being more
competitive. The variance metrics may be combined with other organizations within the
organization to reveal which organization is more profitable. The overall implication of the
differences is that it makes the organization unable to compete well with other players in the
market. The variances computed here have industrial significance. The organization with the
most favorable variances could be the more profitable.
The analysis of the organization’s performance in the first year has been a demonstration
that the organization is in a profitable venture. The organization has been able to make profits
using the best prices possible that has been arrived at following market research. The report has
also shown that the organization faces significant operational risk. Operational risk typically
affects organizations that have high fixed costs (Salazar, 2018). In such a scenario, a small
change in the revenues would affect the organization’s ability to make meet its fixed costs. The
report has shown the essence of ethics while preparing or handling financial information. The
report follows the AICPA code of conduct and principles of disclosures. The report has shown
the need for businesses to reduce variances between actual costs, prices, and work hours and the
budgeted ones. The need for using current information when preparing budgets has been

Report for [Company Name]
highlighted, and the need to reduce variances. The higher the magnitude of the variances, the
lesser the probability of the organization being profitable and competitive with other players in
the industry.

Report for [Company Name]

References

Albalaki, F. M. M. (2018). Customer Profitability Analysis, Cost System Purposes and Decision
Making Process: A Research Framework. Account and Financial Management Journal,
03(05). https://doi.org/10.31142/afmj/v3i5.03
Baranek, D., & Kinory, E. (2020). Statewide Adoption of the AICPA Code of Professional
Conduct: A Review of Recent AICPA Disciplinary Actions. Accounting and Finance
Research, 9(1), 16. https://doi.org/10.5430/afr.v9n1p16
Maliki, A., & Rukmana, H. S. (2020). Calculation of Cost of Production Using the Job Order
Costing Method Against Determination of Selling Prices at PT OTO Media Kreasi.
Neraca : Jurnal Akuntansi Terapan, 1(2), 103–125.
https://doi.org/10.31334/neraca.v1i2.860
Ogungbade, O. I., Adebiyi, I. M., & Odumodu, P. (2020). Standard Costing and Performance of
Manufacturing Firms in Nigeria. The International Journal of Business & Management,
8(10). https://doi.org/10.24940/theijbm/2020/v8/i10/bm2010-036
Salazar, J. I. (2018). The risk averse and prudent newsboy: changes in risk and fixed costs.
International Journal of Operational Research, 31(3), 357.
https://doi.org/10.1504/ijor.2018.089736