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Mazda was organized by Jujiro Matsuda as the Toyo Cork Kogyo Company, Ltd which located in Hiroshima, Japan. Since then, the company began trading in year 1920. Initially, the company involved in manufacturing machine tools, and it expanded its product line into trucks production and has proved commercially successful in the year 1930. In the early 1960, Mazda introduced its first car models and started developing rotary engines. Today, Mazda not only ranked as one of Japan's leading automakers which sells up to 1.2 million units of its vehicles but also manufacture gasoline, diesel, and rotary engines throughout the world (Mazda, 2010).
Being awarded as the best car in certain countries, the company produced sedans, sports cars, mini vans, light trucks, and commercial vehicles under such names as Mazda2, Mazda3, Mazda6, RX-8, and MPV. Therefore, customers are able to decide their car model choices as Mazda has produced various types of car that fulfil customer demand (Mazda, 2008).
One of its successes in sales growth overseas is the capacity of main production sites in Japan and other overseas facilities which included partnership with the Ford Motor Company. Through this global partnership, overall demand in overseas markets can be fulfilled as Mazda can export cars to foreign countries (Mazda, 2010).
This report will be briefly described how Mazda make better decision and improve the efficiency and effectiveness of their operations by using the two financial models; cost assignment and cost-volume-profit analysis (Drury, 2005) although the financial statements indicated that the company faced loss in year 2009 (Mazda, 2010).
2.0 Cost assignment
First of all, cost assignment which contains cost allocation will be used to assign costs when a direct measure does not exist for the amount of resources used by a cost object (Drury, 2005). Cost assignment is used in Mazda for internal and external profit reporting, and to provide useful information for managerial decision making (Eldenburg, Brooks, Oliver, Vesty & Wolcott, 2008). In this case, Mazda will only apply the three steps in assigning its overhead costs to product.
2.1 First step
Using the information given in Example 1, the first step is to assign all manufacturing overheads to production and service cost centres. To do this, overhead analysis sheet is prepared as shown in Figure 1(see appendix 1 and 2).
From Figure 1, the indirect wages and indirect materials have been directly assigned to the cost centres. However, the other costs shown in Example 1 cannot be traced directly because they are common to several cost objects. Therefore, these costs must be allocated to the cost centres using appropriate allocation bases (Drury, 2005). Property taxes, and lighting and heating are related to the total floor area of the building. The total floor area shown in Example 1 is 5000 square metres, machine A occupies 20%, machine B occupies 10%, assembly and materials procurement occupies 30%, and general factory support occupies 10%. Therefore, it can be referred to overhead analysis sheet in Figure 1 that property taxes, and lighting and heating are allocated to the three production centres and two service centres (see appendix 2).
The insurance and depreciation of machinery are related to the book value of machinery (Drury, 2005). Therefore, the book value of machinery for machine A is 6/15, machine B is 5/15, and assembly is 2/15 while both general factory support and materials procurement are 1/15(see appendix 1).
The salaries of work management are related to the number of employees in each centre (Drury, 2005). Therefore, 30% of the salaries of work management are allocated to machine A, machine B 20%, and assembly 30% while both general factory support and materials procurement are 10% (see appendix 1).
As a result, all manufacturing overheads for Mazda have been assigned to the three production centres and two service centres. This is called as overhead allocation in Figure 1 (see appendix 2) (Drury, 2005).
2.2 Second step
The second step is to reapportion the overheads that have been assigned to service cost centres to production cost centres (Drury, 2005). The company has two service centres; general factory support and materials procurement. Although these service centres support the production process, but they do not involved directly with the products (Drury, 2005). To reapportion the overheads from service cost centres to production cost centres, ignore inter service method is used and commencing with the general factory support followed by materials procurement (see appendix 2).
As shown in Figure 1, overhead from general factory support is reallocated to the production cost centres proportionate to direct labour hours where 1/4 for both machine A and B, while 2/4 for assembly (see appendix 1). For materials procurement, it is assumed that the value of materials issued provides a suitable benefit that each of the production centres receives. Therefore, it is assumed that 50% of the value of materials issued to machine A, 30% to machine B, and 20% to assembly.
As a result, all manufacturing overheads have been assigned to the three production centres. This is called as overhead after reallocation in Figure 1 (see appendix 2) (Drury, 2005).
2.3 Third step
The next step is to identify overhead rates for each production cost centres using allocation bases (Drury, 2005). As assumed, the Mazda Company used a machine hour rate for the two machine centres and a direct labour hour rate for the assembly. The overhead rates are calculated using the information given in Example 1(see appendix 1 and 3).
Overall, it was assumed that both of the service cost centres does not serve each other (see appendix 2). Therefore, it can be seen that the overhead allocation process is easier (Drury, 2005).
3.0 Cost-volume-profit analysis
The next task is to examine changes in profits in response to changes in sales volume, costs, and prices using a technique which known as cost-volume-profit (CVP) analysis (Eldenburg, et.al, 2008). There were many ways to present CVP information other than diagram based on the economist's and accountant's cost-volume-profit model. In this case, mathematical relationships were used because the mathematical approach is quicker and easier in producing appropriate information than the graphical approach (Drury, 2005).
To demonstrate the application of the mathematical approach to CVP analysis, an example of Mazda activity will be used. Due to the increasing popularity of customer demand towards its car products and awarded as customer overall satisfaction in Asia Pacific, the management of the Mazda Company has produced a new vehicle called Mazda2 (Mazda, 2010). After discussions with the sales and production teams, the information has been estimated in Example 2 (see appendix 4).
3.1 Break-even quantity and total revenue
The managers of Mazda would be interested in using the break-even figures to calculate how profitable the vehicle will be for the company and to consider the risk of the venture. Based on the Example 2, break-even quantity for Mazda2 is calculated (see appendix 5). From the calculation, this showed that the company needs to sell 11 000 units to recover the fixed and variable costs. For every unit sold, a Â¥ 500m contribution is generated to contribute on fixed costs only as profit is considered to be zero in this situation. Therefore, the 11 000 units will generate a total contribution of Â¥ 5 500 000m which covers the fixed costs. To make a profit, sales would need to exceed 11 000 units.
The break-even point can also be calculated to give the total revenue to cover the fixed and variable costs. Before that, contribution margin ratio needs to be calculated first. Therefore, it can be seen that the sales revenue of Â¥ 31 152 000m is required to break-even (see appendix 6).
3.2 Achieving a targeted profit
Every company would want to earn a profit for investment (Eldenburg, et.al, 2008). In the case of Mazda, the company want to earn Â¥ 300 000m profit. In order to reach this target, Mazda would need to sell more than 11 000 units. Therefore, the quantity of Mazda2 needed to be sold to achieve the targeted profit is calculated (see appendix 7). From the calculation, this means Mazda will need to sell 11 600 units to generate the Â¥ 300 000m profit.
Besides, the needed sales revenue of Mazda2 for the targeted profit can be calculated by using the contribution margin ratio (see appendix 8). From the calculation, the sales revenue is Â¥ 32 851 200m. This would mean that Mazda must increase sales beyond break-even sales of Â¥ 31 152 000m in order to generate the Â¥ 300 000 profit.
3.3 Percentage margin of safety
The percentage margin of safety indicates how much sales may decline before profits reach the break-even point (Eldenburg, et.al, 2008). As for Mazda, the break-even point was calculated as 11 000 units, or Â¥ 31 152 000m in sales revenue. However, the company expected higher vehicles to be sold. For example, sell 12 000 units to produce Â¥ 33 971 647m in sales revenue. Their margin of safety in units of Mazda2 is calculated (see appendix 9). From the calculation, their percentage margin of safety is 8.3%, meaning that sales volume could decrease 8.3% from expected levels before the company expects to meet with a loss.
3.4 Cost-volume-profit (CVP) graph
Although the break-even point can be calculated quickly and easily, the information is then presented in a graphical format which called as CVP graph (Drury, 2005) for a clearer understanding of cost-volume-profit behaviour (Atrill & McLaney, 2007). This would mean that the graphical approach of the break-even chart is important because it shows the relationship between total sales revenue and total costs. It also demonstrates how an organization's profits are expected to change under different volumes of activity (Eldenburg, et. al, 2008). Figure 2 presents a CVP graph for Mazda2.
Note that when no vehicles are sold, fixed costs are Â¥ 5 500 000m. This resulted in a loss of Â¥ 5 500 000m. As sales volume increases, the loss decreases by the contribution margin for each vehicle sold. The point at which the sales revenue line crosses the total costs line is the point where the company makes neither a profit nor a loss. This is the break-even point and is 11 000 units, or total costs and sales revenue equal to Â¥ 31 152 000m. If sales level lesser than 11 000 units, losses will occur. Similarly, if Mazda operates at a sales level above 11 000 units, profit will occur (Drury, 2005). From Figure 2, as sales increase beyond this break-even point, there is an increase in profit, growing by the Â¥ 500m contribution margin. In this case, Mazda's targeted profit achieve the level of Â¥ 300 000m when sales volume reaches 11 600 units.
To reduce payroll, Mazda have been considering in restructuring their sales team by paying commission at Â¥ 50m per Mazda2 sold instead of full time employment. From Example 3, fixed costs would decrease by Â¥ 200 000m to Â¥ 5 300 000m due to the savings in payroll and the variable costs would increase by Â¥ 50m to Â¥ 2382m due to the sales commission per Mazda2. As a result of the change in costs, the break-even point increases to 11 778 units or Â¥33 354 667m. Given expected sales of 12 000 units, the resulting profit is Â¥99 900m. As the profit falls from Â¥500 000m to Â¥99 900m, Mazda would not satisfy with this result (see appendix 10).
In conclusion, Mazda will constantly prepare for higher sales to grow its market share. Innovation will keep to offering customers new, sporty, and profitable vehicles. Besides, implementation of various measures such as reviews of dealer operation standards to strengthen their dealer network is necessary. These measures will help to raise its brand value (Mazda, 2010).