MA-PPP

1

6

Cookie Business

Student Name

Institution

ACC 5301 Management Applications of Accounting

Instructor

Date

Abstract

There are various types of accounting and one of the widely used in decision making is cost accounting which is utilized in the computation of values such as contribution margin, break even points and other important values. The paper is a continuation of the previous units on Cookie business and aims at evaluating which of the products will have more revenue than other products in the business. The calculations have been done on the excel sheet using excel formulas and are embedded on this report. From the analysis the company needs to produce 122,783 units to make profits which means that if it produces below the breakeven point it will make losses.

Cookie Business

The paper focuses on various cost accounting elements which are needed to aid in decision making by the management of Cookie business. The focus of the paper is to aid management make some key decisions on production, investment and different costing methods. The paper is a discussion and looks at different values computed in the excel sheet and what they mean for the business. The paper will give recommendations based on the calculations on the provided in the excel sheet and this report.

Part 1 Contribution Margin/Breakeven

	Chocolate Chip	Sugar	Specialty	Total
Units Sold	1,500,000	980,000	300,000	2,780,000
Sales	$ 1,875,000.00	$ 882,000.00	$ 1,050,000.00	$ 3,807,000.00
Less: Variable Costs	$ 690,000.00	$ 205,800.00	$ 81,000.00	$ 976,800.00
Contribution Margin	$ 1,185,000.00	$ 676,200.00	$ 969,000.00	$ 2,830,200.00
Less: Common Fixed Costs				$ 125,000.00
Profit				$ 2,705,200.00
Per item Contribution Margin	0.79	0.69	3.23
Weighted Average Contribution Margin	1.018
Break-even point in units	122,783

The business sells three types of cookies and from the calculations the cookie with the highest contribution margin is chocolate chip cookies. However when it comes to the per item contribution margin the specialty has a higher value which means that if more units are produced the company will earn huge profits (Raiborn et al., 2020). The business has a breakeven point of 122, 783 units and that means that it has to sell more than these units to make profits else it will make losses.

Part 2 Full and Variable Costing

Productions Costs:
Direct material	$ 0.60
Direct labor	$ 1.00
Variable manufacturing overhead	$ 0.40
Total variable manufacturing costs per unit	$ 2.00
Fixed manufacturing overhead per year	$ 139,000.00
In addition, the company has fixed selling and administrative costs:
Fixed selling costs per year	$ 50,000.00
Fixed administrative costs per year	$ 65,000.00
Selling price per cookie	$ 3.75
Number of cookies produced	2,780,000
Number of cookies sold	2,600,000
Full (absorption) costing :
Full cost per unit	$ 2.05
Ending Inventory Full (absorption) costing	$ 369,000
Variable costing :
Variable cost per unit	$ 2.00
Ending Inventory Variable costing	$ 360,000

The ending inventory of the organization is the value of the difference between the number of cookies produced and the number of cookies sold. For absorption costing the absorption rate is 2.05 and the ending inventory under the method is higher when compared to when using the variable costing method. The variable costing method is more helpful to Cookie business and this is because it makes the process of decision making faster and will also offer more important information to the management with regard to the pricing decisions compared to absorption costing.

Part 3 Special Order

Number of cookies needed	1,000
Discounted price per cookie	$ 2.75
Normal price per cookie	$ 3.75
Cost of special printed design per cookie	$ 0.50
Cost of tool needed to make the design	$ 100.00
Revenue for special order	$ 3,750
Costs for special order:
Design cost	$ 500
Tool cost	$ 100
Net increase (decrease) in profit	$ 3,150

The special order will increase the profit of the Cookie business by $3150 and will also have additional costs for design of the cookies worth $500 and $100 for the sprinted design and for the tool respectively. Since business is slow the offer should be taken since the wedding order will earn the company additional profits (Banerjee, 2021).

Part 4 Internal Rate of Return

Purchase of new equipment	$ 250,000.00
Expected annual increase in sales	$ 48,017.50
Time frame	7 years
Acceptable rate needed	9%
Calculate the Internal Rate of Return:
PV of annuity factor	5.2064
Internal rate of return	8%
Accept or reject	REJECT

The equipment should not be bought since the IRR is less than the acceptable which means that the revenue from the equipment is not much (Cristea, 2018). There are various ethical concerns in relation to the investment. One ethical issue is that there is a conflict of interest since the seller is a brother to one partner and he might insist that the equipment is important to the business when in real sense it is not.

Part 5 Cash Budget

The budgeted credit sales are as follows:
December last year	$ 250,000
January	$ 125,000
February	$ 300,000
March	$ 90,000
Collection:
Month of the sale	80%
Month following the sale	20%
Estimated cash receipts
	January	February	March
Last month's sales	$ 50,000	$ 25,000	$ 60,000
Current month's sales	$ 100,000	$ 240,000	$ 72,000
Total	$ 150,000	$ 265,000	$ 132,000

The business receives 80% of the sales revenue in the month of the sale and the rest is received in the next month. From the computations of cash receipts for the three months, the business will be unable to meet its expenses in March since a minimum of $132,000 is required.

Part 6 Material and Labor Variance

Actual Cost of Direct Materials	$ 225,000
Standard Cost of Direct Materials	$ 224,800
Actual Materials Used	30
Standard Materials Used	31
Actual Direct Labor Rate	$ 15.50
Standard Labor Rate	$ 15.00
Actual Hours Worked	45
Standard Hours Worked	40
	Amount	Favorable/ Unfavorable
Calculate Materials Variances:
Materials Price Variance	7,452	UNFAVORABLE
Materials Quantity Variance	$ 7,252	FAVORABLE
Calculate Labor Variances:
Labor Rate Variance	22.50	UNFAVORABLE
Labor Efficiency Variance	75.00	UNFAVORABLE

From the calculations, the materials price variance, Labor rate variance and the labor efficiency variances are unfavorable and hence there is need to improve them. The materials price variance can be improved through improving the price negotiations and the purchasing process. There are various changes in the rates of paying employees and the company should ensure they are up to date with the latest standards so that it can improve the labor rate variance (Cristea, 2018). The efficiency of labor needs to be improved and that can be attained through additional training for the employees.

Conclusions and Recommendations

As seen in the analysis of the business specialty cookies have more income and hence the company should stop producing more chocolate chip cookies and instead increase its production of the specialty cookies. The business should use the variable costing method instead of the absorption costing to increase the efficiency of decision making in the organization. The company should not purchase the new equipment since there are ethical concerns about whether the equipment is good for the business or not. The management should focus on improving efficiency of employees to enhance profits in the organization.

References

Banerjee, B. (2021). Cost accounting: Theory and practice. PHI Learning Pvt. Ltd..

Cristea, V. G. (2018). Historical cost accounting or fair value accounting: a historical

perspective. Challenges of the Knowledge Society, 842-845.

Raiborn, C. A., Kinney, M. R., & Barfield, J. T. (2020). Cost Accounting Traditions &

Innovations. South-Western College.