Specialty Cookie Company: Costing Methods and Business Decisions
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:
Gain an understanding of product costing (direct materials, direct labor, and overhead).
Review job order costing.
Review process costing.
Make business decisions based on analyzing accounting data.
Details:
First, start the paper with an abstract and introduction section per the assignment template provided above.
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 (this is the first and only order).
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.
For process costing, examine the costs per 1,000 cookies looking at these top three processes (departments): Mixing, Add-ins, Packaging.
The Mixing Department will be examined in depth (only do this department).
All materials will be added in at the beginning of the process.
The cookies will be in the Mixing Department for a total of 8 hours (use two employees, 4 hours each as your direct labor). The cookies will be 100% complete with respect to materials, and only be 40% complete with respect to conversion costs (labor and overhead) before they are transferred to the Add-ins Department. Manufacturing overhead is 30% of direct labor costs.
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 (job order vs. process costing), 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.
End this paper with the key observations and present any future recommendations. Use the for your job order, and process costing spreadsheets to be embedded in your case study document.
Specialty Cookie Company: Costing Methods and Business Decisions
Abstract
This project explores the establishment of a specialty cookie company focusing on understanding product costing methods, specifically job order and process costing. It analyzes the costs associated with the production of 1,000 cookies, including direct materials, direct labor, and manufacturing overhead. The project also examines the implications of various costing methods on managerial decision-making and revenue generation based on variations in sales volume. Through this analysis, key observations and future recommendations for the business will be provided.
Introduction
In a rapidly evolving culinary market, specialty cookies have carved out a niche that appeals to gourmet enthusiasts and casual consumers alike. This project outlines the establishment of "Sweet Sensations," a cookie company located in Portland, Oregon, focused on producing high-quality gourmet chocolate chip cookies. The mission of Sweet Sensations is to create a memorable cookie experience using premium ingredients while fostering a sustainable business model that supports local suppliers. Understanding product costing is vital for the success of Sweet Sensations, as it informs pricing strategies and operational efficiencies. This paper will explore both job order and process costing methods, assess their applicability, and discuss their impact on revenue based on varying sales volumes.
Part 1: Establishing the Cookie Business
Business Name: Sweet Sensations
Location: Portland, Oregon
Mission Statement: "To delight our customers with exceptional gourmet cookies made from the finest ingredients, while promoting sustainability and supporting our local community."
Type of Cookie: Gourmet Chocolate Chip Cookies
Part 2: Costing and Sales Information for 1,000 Cookies
Job Order Costing
For the production of 1,000 gourmet chocolate chip cookies, we will determine the cost per cookie based on job order costing.
Direct Materials
The top five ingredients and their estimated costs are as follows:
1. All-purpose flour (10 lbs) - $5.00
2. Butter (5 lbs) - $10.00
3. Brown sugar (3 lbs) - $6.00
4. Granulated sugar (2 lbs) - $2.50
5. Chocolate chips (2 lbs) - $8.00
Total Direct Materials Cost:
$5.00 + $10.00 + $6.00 + $2.50 + $8.00 = $31.50
Direct Labor
Assuming an hourly wage of $15 for each employee:
- Total hours worked: 2 employees x 8 hours = 16 hours
- Direct Labor Cost: 16 hours x $15/hour = $240
Manufacturing Overhead
Manufacturing overhead is calculated as 30% of direct labor costs:
- Overhead Cost: 30% x $240 = $72
Total Cost Calculation
Total Costs = Direct Materials + Direct Labor + Manufacturing Overhead
Total Costs = $31.50 + $240 + $72 = $343.50
Cost per Cookie:
Cost per cookie = Total Costs / Number of Cookies
Cost per cookie = $343.50 / 1,000 = $0.3435 (approximately $0.34)
Process Costing
For process costing, we will focus on the Mixing Department.
Mixing Department Costs:
- Direct Materials (100% complete): $31.50
- Direct Labor (40% complete): - Labor for Mixing = 4 hours x 2 employees x $15/hour = $120 (40% complete)
- Conversion Costs = $120 x 40% = $48
- Manufacturing Overhead (30% of direct labor): - Overhead for Mixing = 30% x $120 = $36
Total Costs for Processing in Mixing Department:
Total Costs = Direct Materials + Direct Labor + Manufacturing Overhead
Total Costs = $31.50 + $48 + $36 = $115.50
Cost per Cookie in Mixing Department:
Cost per cookie = Total Costs / Number of Cookies
Cost per cookie = $115.50 / 1,000 = $0.1155 (approximately $0.12)
Sales Price Estimation
To ensure profitability while remaining competitive, we might set the sales price at a markup of 100% over the total cost per cookie calculated from job order costing.
Sales Price per Cookie:
Sales Price = Cost per cookie x 2
Sales Price = $0.34 x 2 = $0.68
Part 3: Comparison of Costing Methods
Job order costing is often more suitable for businesses that produce distinct products or batches, providing detailed tracking of costs associated with specific orders. In contrast, process costing aggregates costs across departments and is more effective for mass production scenarios where products are homogeneous.
For Sweet Sensations, job order costing offers actionable insights into individual orders, which is beneficial for managing unique customer requests or special events. Conversely, process costing focuses on efficiency within the Mixing Department, allowing management to identify areas for cost reduction in a standardized production environment.
In conclusion, while both methods provide valuable information, job order costing may be more useful for managerial decision-making at Sweet Sensations due to its ability to track specific costs associated with individual cookie batches.
Part 4: Impact of Sales Volume Changes on Revenue
The revenue generated by Sweet Sensations will be directly influenced by changes in sales volume. If sales increase beyond the initial order of 1,000 cookies, revenue will rise proportionally as long as fixed costs remain constant, allowing for greater profitability per unit sold due to economies of scale.
Conversely, if sales decrease, the company may struggle to cover fixed costs, potentially leading to losses. Therefore, Sweet Sensations should implement effective marketing strategies to maintain customer interest and encourage repeat purchases.
Conclusion and Future Recommendations
This analysis has highlighted the importance of understanding product costing methods—job order and process costing—in making informed business decisions at Sweet Sensations. Key observations include:
- Job order costing provides detailed insights into individual orders beneficial for customization.
- Process costing aids in identifying cost efficiencies in production.
- Revenue is sensitive to fluctuations in sales volume; strategic marketing approaches are essential to sustain profitability.
Future Recommendations:
Sweet Sensations should consider expanding its product line to include seasonal or limited-edition flavors to attract a wider customer base. Additionally, investing in marketing campaigns can help increase brand visibility and drive sales growth.
By strategically leveraging these insights and recommendations, Sweet Sensations can position itself for sustained success in the competitive specialty cookie market.