Carl Simons sat back in his chair wondering about what he had just done. He accepted a special order from a national supplier of wellness products for 200,000 chocolate bars at a 20 percent discount from the usual price. It is a new type of bar and the company provided the recipe. The company also hinted about a second order for 150,000 bars if the first order was successful. Carl sighed and thought, ‘‘I hope we can make a profit on this order, because we are going to have to increase our capacity big-time to fill it. Wish I knew what the cost will be.’’
Overview Of Company
Fancy Chocolate (F.C.) is the major product line of Kangaroo Valley Foods, in Berry, NSW. President Carl Simons was burned out by 30 years in the food service industry and decided to sell his business and begin anew. Quite by accident, he received a call asking if his new company Kangaroo Valley Foods would consider selling chocolate bars. Carl’s son Rob was employed by a German company and was frequently flying to Europe and returning with wonderful chocolate as family gifts. Carl wondered how he could produce European-style chocolate (no waxes or preservatives) in Australia. With his son’s help, he found a supplier in Germany who would ship to Australia. Carl purchased a chocolate factory in Berry and began production in August 2005. Tanya Mason, Vice President, oversees the creative arts department and assists Carl in managing the plant. What started with one basic milk chocolate bar has grown to include two milks, two darks, two semi-sweets, one white, one bittersweet, and other adaptations involving various ingredients such as coffee, berries, and fresh mint. The chocolate is wonderful, but the real charm of the product is its custom labelling. For individual snacking, F.C. bars are sold in specialty markets, fine gift stores, and other locations. They are also available for corporate events and celebrations, such as weddings and birthdays.
Now put yourself in Carl Simons’s shoes and think about what type of costing approach will help you determine more accurate products costs for pricing different orders, like the recent big order. In Part A, you will analyse F.C.’s situation, identify its information needs, evaluate the pros and cons of different costing approaches, recommend an approach, and suggest ways to implement it.
Choosing a Costing System
- What information does F.C. need?
Before recommending a cost system, it is helpful to understand the cost information needs of the company. Conduct some research to explain the value of cost classifications for F.C. and how this may assist Carl in improving their decision-making processes.
- Which costing approach(es) do you recommend?
Conduct some research into costing techniques that F.C. might find useful.
- Discuss the pros and cons of the different costing approaches available to F.C., including job order costing, process costing, hybrid costing, and activity-based costing.
- Based on your analysis of costing approaches, which approach do you recommend F.C. use for direct costs? What about indirect costs? Provide support for your recommendation. Keep in mind it is a small company with limited staff and they do not currently track actual cost information during production. The approach should also be flexible enough to handle high-volume or low-volume months.
- Discuss how you would handle different types of costs such as special ingredients, stir-ins, or labeling design costs for the new special order from the wellness company. You do not need to state how you would handle each specific ingredient.
- Using the detail in the case, describe howyour chosen method of calculating product cost will be beneficial within F.C. and have relevance to management.