Cookie Business

In this project, you will be opening your own specialty cookie company to see how product costing methods and changes in production affect business decisions. You will be creating a series of reports and analyzing the results using the template provided to guide you through the project. The learning objectives of this project are as follows: 1. Gain an understanding of product costing (direct materials, direct labor, and overhead). 2. Review job order costing. 3. Review process costing. 4. Make business decisions based on analyzing accounting data. You will prepare a four- to five-page written report (including spreadsheets) with at least two scholarly sources using the Unit III Project Template. Your report will provide the following information: Introduction Part 1: Establish a cookie business selling only one type of specialty cookie with two employees making the cookies. Create a name and establish a location for the business. Construct a mission statement for the business. Decide on the type of cookie you want to make and sell. Part 2: Develop costing and sales information for 1,000 cookies. Estimate and explain the cost per cookie based on job order costing (manufacturing overhead is 30% of direct labor costs). Prepare a job order cost sheet by researching and identifying the top five ingredients and their estimated costs as your direct materials. Research and identify the cost of wages for your two employees as your direct labor. It typically takes two days to make 1,000 cookies. Estimate and explain the cost per cookie based on process costing with 40% conversion costs. Identify the top three processes you feel are needed to make the cookies and prepare a production cost sheet for one of those processes. Estimate and explain the sales price you plan to set per cookie based on the cost data. Part 3: Compare and contrast the costing methods used in this project, including which you believe provides the most useful information as a manager. Part 4: Discuss what will happen to revenue if the number of the cookies sold increases or decreases.

The Cookie Business: An Analysis of Product Costing Methods and Business Decisions

Introduction

In the world of entrepreneurship, starting a specialty cookie business can be an enticing endeavor. Not only does it allow for the creation of delicious treats, but it also requires careful consideration of product costing methods and the impact of production changes on business decisions. This essay aims to explore the various aspects of establishing a cookie business, including the selection of a name and location, the development of costing and sales information, and an analysis of different costing methods. Additionally, the essay will discuss the potential effects on revenue if the number of cookies sold increases or decreases.

Part 1: Establishing the Cookie Business

Name and Location: One of the first steps in establishing a business is choosing an appealing name that reflects the company’s values and products. For our specialty cookie business, we could consider a name like “Sweet Indulgence Cookies.” As for the location, it would be ideal to find a spot in a high-traffic area, such as a shopping mall or a busy downtown street, to attract potential customers.
Mission Statement: Crafting a mission statement is crucial as it outlines the purpose and goals of the business. The mission statement for Sweet Indulgence Cookies could be: “Our mission is to create and deliver high-quality, gourmet cookies that bring joy and satisfaction to our customers. We strive to use the finest ingredients, innovative recipes, and exceptional customer service to create an unforgettable cookie experience.”
Choice of Cookie: To stand out in the market, it is essential to choose a unique and delicious specialty cookie. After conducting market research and considering current trends, we could select a decadent “Triple Chocolate Chunk Cookie” as our signature offering. This cookie would be loaded with three types of high-quality chocolate chunks, ensuring a rich and indulgent experience for cookie lovers.

Part 2: Costing and Sales Information for 1,000 Cookies

Job Order Costing: Job order costing involves allocating costs to specific jobs or batches of products. For the 1,000 Triple Chocolate Chunk Cookies, we need to estimate the cost per cookie based on job order costing. Assuming the direct labor cost is $20 per hour and it takes two employees eight hours to make 1,000 cookies, the total direct labor cost would be $320. With manufacturing overhead accounting for 30% of direct labor costs, the manufacturing overhead would amount to $96. Thus, the total cost per cookie based on job order costing would be $0.416 ($416/1,000 cookies).
Direct Materials: To calculate the cost per cookie accurately, we need to identify the top five ingredients and estimate their costs as direct materials. Based on research, the estimated costs for the top five ingredients for the Triple Chocolate Chunk Cookies are as follows:
- Premium Chocolate Chunks: $12
- Butter: $6
- Sugar: $4
- Flour: $3
- Eggs: $4
Process Costing: Process costing is used when products are produced in a continuous flow rather than in separate batches. While job order costing focuses on specific jobs, process costing considers the average costs incurred for each unit produced. Assuming a conversion cost of 40%, we can estimate the cost per cookie based on process costing. Identifying the top three processes involved in making the cookies, we can prepare a production cost sheet for one of those processes. For example, the mixing process could require labor, energy, and equipment costs, totaling $150. With a conversion cost of 40%, the cost per cookie based on process costing would be $0.15 ($150/1,000 cookies).
Sales Price: After determining the cost per cookie using both job order costing and process costing, we can set a suitable sales price. Considering the quality and uniqueness of our Triple Chocolate Chunk Cookies, along with market analysis, we could set the sales price at $1.50 per cookie.

Part 3: Comparing Costing Methods

Both job order costing and process costing have their merits and provide useful information for managers. Let’s compare and contrast these methods:

Job Order Costing: This method is suitable for businesses that produce customized or unique products. It allows for accurate tracking of costs related to specific orders or batches, providing detailed information about individual product profitability. Job order costing is beneficial when each product requires different materials, labor, and overhead costs.
Process Costing: Process costing is ideal for businesses that produce large quantities of similar products in a continuous flow. It calculates average costs per unit, enabling managers to assess the overall cost efficiency of the production process. Process costing provides valuable insights into production bottlenecks and helps identify areas for cost reduction and process improvement.

In terms of usefulness as a manager, job order costing offers more detailed insights into individual product costs, aiding in pricing decisions and identifying profitable products. On the other hand, process costing provides a broader overview of overall production costs, facilitating strategic planning and operational improvements.

Part 4: Impact on Revenue

The number of cookies sold directly impacts revenue. If the number of cookies sold increases, revenue will rise proportionally. For example, if we sell 2,000 Triple Chocolate Chunk Cookies instead of 1,000, and the sales price remains $1.50 per cookie, the total revenue would double from $1,500 to $3,000. Conversely, if the number of cookies sold decreases, revenue will decline accordingly. For instance, if we only sell 500 cookies and the sales price remains the same, the total revenue would decrease to $750. It is crucial for business owners to monitor sales and adjust production levels accordingly to maximize revenue and maintain profitability.

Conclusion

Establishing a specialty cookie business involves careful consideration of product costing methods and the potential impact of production changes on business decisions. By utilizing job order costing and process costing, managers can gain valuable insights into individual product costs and overall production efficiency. Additionally, monitoring the number of cookies sold and adjusting production levels accordingly is essential to maximizing revenue. With a well-crafted mission statement, a unique cookie offering, and a thorough understanding of costing methods, entrepreneurs can embark on a successful journey in the cookie business.