Case Studies: Delicious Cakes Factory And Foxwood Company - Essay.

Delicious Cakes Factory Overview

Delicious Cakes Factory operates a chain of bakeries in Canberra that specializes in supplying a range of cakes to restaurants and coffee shops. Major products include lamingtons, scones and custard tarts. Until last year, sales levels were fairly stable. However, sales have been decreasing for the last 18 months. Ralph Slick, the marketing manager of Delicious Cakes Factory, is worries, and has visited major customers to find out the reasons for their decreasing sales orders. The comments of the owner of one of the most popular Canberra coffee shops sum up the general response: “Ralph, your style of cakes is old-fashioned. They are not what people want any more. Our customers prefer lighter, tastier food. They want variety, and are willing to pay more for high quality innovative creations.”

At a recent meeting, Slick stated that the company should expand its product offerings, or there may be no future for the company. Specifically, he believes that there are untapped markets for gourmet pies. The managing director is uncertain; he stated: “I really don’t think that we can afford to invest time and money into fads. We sell cakes, we are not a gourmet caterer!” Slick points out that it is these new items that customers are asking for, so it makes sense from a strategic point of view to develop these products. However, the managing director is still uncertain: “I have no idea whether we are going to make a profit this year, and cash is always tight. We don’t need strategies, I prefer to just sell good products.”

Slick understands why the managing director is resisting his plea to be more innovative with products--the bakery has been producing the same line of cakes for 30 years. Slick also knows that there has never been any formal planning undertaken within the company, or consideration of objectives or strategies.

• Ralph Slick has asked for your help. As the new management accountant, prepare a report for the managing director outlining the advantages of implementing processes to determine organizational objectives, strategies and planning systems.
  
  
• Consider the nature of the control system that you could design to report on monthly performances. What types of information do you think may be of interest to Slick and the managing director? Consider both financial and non-financial data.

Foxwood Company is a metal and woodcutting manufacturer, selling products to the home construction market. Consider the following data for 2018:

Sandpaper	$2,000
Materials-handling costs	70,000
Lubricants and coolants	5,000
Miscellaneous indirect manufacturing labour	40,000
Direct manufacturing labour	300,000
Direct materials inventory 1 Jan 2018	40,000
Direct materials inventory 31 Dec 2018	50,000
Finished goods inventory 1 Jan 2018	100,000
Finished goods inventory 31 Dec 2018	150,000
Work in process inventory 1 Jan 2018	10,000
Work in process inventory 31 Dec 2018	14,000
Plant leasing costs	54,000
Depreciation – plant equipment	36,000
Insurance on plant equipment	3,000
Direct material purchased	460,000
Sales revenues	1,360,000
Marketing promotions	60,000
Marketing salaries	100,000
Distribution costs	70,000
Customer service costs	100,000

1)  Prepare a schedule of cost of goods manufactured.

2)  Prepare a schedule of costs of goods sold.

3)  Prepare an income statement.

Karlene Industries produces plastic ice cube trays in two processes: heating and stamping. All materials are added at the beginning of the Heating Department process. Karlene uses the weighted averaged method to compute equivalent units.

On 1 November 2016, the Heating Department had in process 1,000 trays that were 70% complete. During November, it started into production 12,000 trays. On 30 November, 2016, 2000 trays that were 60% complete were in process.

The following cost information for the Heating Department was also available.

Work in process, 1 November:
                                

Direct material (100% complete)	$640
Conversion costs (70% complete)	$360
Balance in work in process, 1 November	$1,000

Costs incurred during November:

Direct material                     $3,000

Conversion costs:

Direct labour                         $2,300

Manufacturing overhead        $4,050     $6,350

Total production costs incurred during November       $9,350

1. Analysis of physical flow of units
2. Calculation of equivalent units
3. Calculation of units cost
4. Analysis of total costs

Martinez Building Products Company is one of the largest manufacturers and marketers of unique, custom made residential garage doors in the U.S. It also is a major supplier of industrial and commercial doors, grills, and counter shutters for the new construction, repair, and remodel markets.

Martinez uses a job cost system and applies overhead to production on the basis of direct labour cost. In computing a predetermined overhead rate for the year 2018, the company estimated manufacturing overhead to be $24 million and direct labour costs to be $20 million. In addition, it developed the following information.

Actual costs incurred during 2018

  Direct materials used                                     $30,000,000

  Direct labour cost incurred                               21,000,000

  Insurance for factory                                      500,000

  Indirect labour                                                7,500,000

  Factory maintenance                                       1,000,000

  Rent on factory building                                    11,000,000

  Depreciation on factory equipment                    2,000,000

• Why is Martinez Building Products Company using a job costing system?
  
  
• On what basis does Martinez allocate its manufacturing overhead? Please calculate the predetermined overhead rate for 2018.
  
  
• Calculate the amount of the under- or overapplied overhead for 2018.

• In the given question the business of cakes of Delicious Cakes factory is getting out of business, the reason being the conventional style of cakes and no new ideas or new style of producing cakes. The managing director of Delicious Cakes is reluctant to accept the idea of the marketing director to improvise the style of cakes and enter into the business of producing gourmets pies because of low profits from the existing business and low level of funds.

Being the management accountant there are various advantages of improvising the style of the cakes and stepping into the business of producing the gourmet pies. These are being present below in various points:

• Introduction of gourmet pies will boost the brand image of Delicious Cakes since the market is untapped and the competition is very low. It will be an easy entry for the Delicious Cakes into the market(Dumay & Baard, 2017).
• The customer base will increase tremendously even for the existing cakes. Since the customers will be more eager to try the Gourmet pies, as it will be new to the market, we will be able to sell the existing cakes also by improvising the same and making it more attractive.
• The consumers are willing to pay more for quality products so it will be favourable for us to set a high price of gourmet pies to recover the initial costs and by the time, competitors will enter the market we will already have recovered our costs and would have started earning profits. We would have reached our growth stage(Alexander, 2016).
• With good marketing and advertising, we can create a long lasting goodwill and brand image of the business. Since the product is new to the market, it will attract vast customers.

• We can adopt the management control system to assess the performance of the company. The quantity, which is being produced, and the sales achieved(Visinescu, et al., 2017). There should be target sales, which have to be achieved by the marketing head. The feedback of the consumers is very important to assess in order to improvise the tastes and design of the product. There are various types of information which would merit the attention of Slick and managing director, these are:

• Additional cost being incurred in the introduction of gourmet pies along with improvising the existing cakes(Heminway, 2017).
• Incremental revenue from the sales of gourmet pies. The sales quantity of gourmet pies and the point at which the company breaks even.
• Customer feedback is of most importance in case of introduction of new products. The feedback about the taste of the product as well as the design.

• The schedule of cost of goods manufactured is as follows:

Foxwood Company

Particulars		Amount ($)	Amount ($)
	Direct Material
	Direct material inventory 1st Jan 2018	40,000.00
Add:	Direct Material Purchased	460,000.00
Less:	Direct material inventory 31st Dec 2018	(50,000.00)
	Direct Material Consumed		450,000.00
	Direct Manufacturing Labour		300,000.00
	Materials handling cost		70,000.00
	Sandpaper		2,000.00
	Lubricants & Coolants		5,000.00
	Work in process inventory 1 Jan 2018		10,000.00
	Work in process inventory 31 Dec 2018		(14,000.00)
	Cost of Goods Manufactured		823,000.00

• The Schedule of cost of goods sold is as follows:

Foxwood Company

Particulars		Amount ($)	Amount ($)
	Direct Material
	Direct material inventory 1st Jan 2018	40,000.00
Add:	Direct Material Purchased	460,000.00
Less:	Direct material inventory 31st Dec 2018	(50,000.00)
	Direct Material Consumed		450,000.00
	Direct Manufacturing Labour		300,000.00
	Materials handling cost		70,000.00
	Sandpaper		2,000.00
	Lubricants & Coolants		5,000.00
	Work in process inventory 1 Jan 2018		10,000.00
	Work in process inventory 31 Dec 2018		(14,000.00)
	Cost of Goods Manufactured		823,000.00
	Miscellaneous indirect manufacturing labour	40,000.00
	Plant leasing costs	54,000.00
	Depreciation – plant equipment	36,000.00
	Insurance on plant equipment	3,000.00
	Marketing promotions	60,000.00
	Marketing salaries	100,000.00
	Distribution costs	70,000.00
	Customer service costs	100,000.00	463,000.00
	Cost of Goods Sold		1,286,000.00

• The income Statement is as follows:

Foxwood Company

Particulars		Amount ($)	Amount ($)
	Total Sales Revenue		1,360,000.00
	Total Income (A)		1,360,000.00
	Direct Material
	Direct material inventory 1st Jan 2018	40,000.00
Add:	Direct Material Purchased	460,000.00
Less:	Direct material inventory 31st Dec 2018	(50,000.00)
	Direct Material Consumed		450,000.00
	Direct Manufacturing Labour		300,000.00
	Materials handling cost		70,000.00
	Sandpaper		2,000.00
	Lubricants & Coolants		5,000.00
	Work in process inventory 1 Jan 2018		10,000.00
	Work in process inventory 31 Dec 2018		(14,000.00)
	Cost of Goods Manufactured		823,000.00
	Miscellaneous indirect manufacturing labour	40,000.00
	Plant leasing costs	54,000.00
	Depreciation – plant equipment	36,000.00
	Insurance on plant equipment	3,000.00
	Marketing promotions	60,000.00
	Marketing salaries	100,000.00
	Distribution costs	70,000.00
	Customer service costs	100,000.00	463,000.00
	Cost of Goods Sold		1,286,000.00
	Total Expenditure (B)		1,286,000.00
	Net Income (A-B)		74,000.00

 

• Analysis of physical flow of units is as follows:

Particulars	Units
Work in progress, 1st November , 2016	1,000
Units started in November	12,000
Total units account for	13,000
Work in progress, 30th November,2016	2,000
Units completed & transferred during November, 2016	11,000

• Total equivalent units = Total unit completed + work in process x percentage of completion

11000 + 1000 x .70 + 2000 x .40

12,500

• Calculation of Units cost is as follows:
  
  

Particulars	a) Direct Material	b) Conversion Cost
Work in progress, 1st November , 2016	640.00	360.00
Units started in November, 2016	3,000.00	6,350.00
Total units account for (a)	3,640.00	6,710.00
Equivalent Units (b)	11,000.00	12,500.00
Cost per unit (a/b)	0.33	0.54

• Analysis of total cost is as follows

Total cost = Cost of beginning inventory + costs added during the year

        $ 1,000.00 + $ 9,350.00

        $ 10,350.00

Total cost for 11000 units completed and transferred in November = 11000 * (0.33+0.54)

= $9570

Therefore the total cost incurred by the company on the units produced in November month is $9570.

• Job costing system of cost accounting is a very famous method of cost accounting. This method of cost accounting is mostly used by business concerns, which are keen in tracing costs, which are specific to particular jobs, or individual jobs in order to examine the costs so that the same can be reduced(Linden & Freeman, 2017). Under job costing system of cost accounting various costs, namely: material cost, labour cost as well as overhead costs are accumulated for a particular or specific job.  Moreover, job costing can also be used to track the cost, which has been incurred in excess so that the same can be recovered from the ultimate customer by billing them the same.

In the given question, the company Martinez Building Products uses job-costing system for cost accounting (Choy, 2018). Since the company is in the business in manufacturing and marketing doors which are unique as well as customized doors for residential garages along with other variant fashion of doors, the company wants to know the cost incurred in each variant of the door which is being manufactured in order to take steps in reducing costs so that the profits can be maximized and accordingly cost control measures can also be taken. It is very much prudent for Martinez Building Products Company to have adopted job-costing system of accounting for costs (Goldmann, 2016).

• We have observed that Martinez Building Products Company allocates the total overhead costs based on direct labour costs. The same can be computed by dividing the total overhead cost by total direct labour cost(Jefferson, 2017).

The calculation for total overhead rate is as follows:

Total overhead cost / total direct labour cost

= $ 24000000 / $ 20000000

= $ 1.20 per Direct Labour Hour

• Calculation of over/under applied overhead cost is as follows:
  
  

Particulars	Amount ($)
Insurance for factory	500,000.00
Indirect Labour	7,500,000.00
Factory maintenance	1,000,000.00
Rent on factory building	11,000,000.00
Depreciation on factory equipment’s	2,000,000.00
Total Overhead cost Incurred (a)	22,000,000.00
Budgeted Overhead cost                                                         (b)	24,000,000.00
Actual Direct Labour Cost                                                        (c)	21,000,000.00
Actual Overhead Rate per direct labour hour (a/c)                     (d)	1.05
Budgeted Overhead Rate per direct labour hour (b/c)               (e)	1.14
Over applied Overhead cost per direct labour hour (e-d)	0.10

 

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, 3(1), p. 145.

Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge Companion to Qualitative Accounting Research Methods, p. 265.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.

Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.