COOKIE BUSINESS 2 Running head: COOKIE BUSINESS 1 Cookie Business Final Project

COOKIE BUSINESS 2

Running head: COOKIE BUSINESS 1

Cookie Business Final Project

Cassandra Moore

Columbia Southern

ACC5301 Management Applications of Accounting

Dr. Renee.Norris Jones

4/5/2022

Abstract

In particular, the investigation is concerned with the examination of the financial records of Cookies, Inc., a relatively new corporation. When determining the financial status of the company, the contribution margin, full and variable costing, special orders, the internal rate of return, the cash budget, and material and labor variance were all taken into consideration, among other things. Data was analysed to determine the best actions for the company and the actions that bring adverse effects. Based on the information provided, recommendations were made to the company in order to help them make more productive decisions and to assist them in their expansion.

Introduction

The report shows how the money from the Cookie business was analyzed. The costing process will be used to figure out how much production and how much money the company needs to stay afloat in an industry where there is a lot of competition. Specifically, the Cookie business wants to change the market by cutting prices and becoming more visible in the sector. Thereby, the information will assist the Cookie company’s management make the right conclusions and suggestions about the corporation’s economic abilities so that they can achieve their corporate goals.

Part 1: Contribution Margin/Breakeven

Cookie Business

 

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

0.78

0.70

3.22

 

 

 

Weighted Average Contribution Margin

0.743

 

Break-even point in units

168,139

 

 

 

Contribution margin is a cost-accounting figure which tells a firm how profitable each of its products is (Masterov, 2020). the tab above shows the contribution margin for the Cookies firm for the following products, chocolate chips, sugar, and other products, like candy.  The table above shows that the Specialty item had the greatest contribution margin of 3.22 of the three items being sold by the Cookies Business. This means that the specialty item has the highest profitability  of the three items. The other two items, chocolate chips and sugar products, each had a contribution margin of 0.78 and 0.70. However, the company is still required to sell 168,139 units of the products to make money, basing on the break-even point in units that was found in the table.

Part 2: full and Variable Costing

Cookie Business

0Productions 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

When determining closing inventory, the organization use absorption or variable costing methods.Absorption costing refers to the process of determining the final list that takes into account all of the expenses associated with production, including the fixed costs (Pong & Mitchell, 2006). In contrast,  variable costing includes all cost of production, with the exception of fixed expenses, on the assumption that a corporation must bear the fixed expenses regardless of whether or not the commodity is produced. The table above illustrates the ending inventory of the Cookie firm as calculated using absorption and the variable costing methodologies. Cookies enterprise ending inventory based o n the absorption costing totaled US$369,000, with a cost per unit of US$ 2.05.

In contrast, variable costing resulted in an ending inventory of US$ 360,000 with a variable costs per unit of US$2.00, resulting in an ending inventory of US$ 360,000. The variable costing method resulted in a reduced inventory, resulting in a variance of US$9,000 between the two methods. the Cookies manager may employ absorption costing to improve the ability to collect the ascribed costs associated with the manufacturing process, resulting in a decrease in profit margins overall. As a result, the company’s manager must design tactics to boost efficiency while also facilitating the company’s expansion and profitability.

Part 3: Net Increase or Decrease Attributed to a Special Order

Cookie Business

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

$ 2,750

Costs for special order:

Design cost

$ 500

Tool cost

$ 100

Net increase (decrease) in profit

$ (1,600)

A client’s extra order of a required product is a critical part of business that requires a special order in management account. Typically, firms do not include in special orders when calculating yearly expenditures and other strategic plannings, such as capital expenditures (Masterov, 2020). It is thus possible for businesses to make more money above and beyond their expected/average sales projections by placing a customized order. There is a tendency for a corporation to give a cheaper price than the normal market pricing for the commodities that can be purchased through a special order, which may or may not contain additional fees. Therefore, a thorough decision-making process is needed to make sure that the firm’s unique order is lucrative.

Cookie business got an order to create 1,000 cookies for wedding at a discount price of $ 2.69 per cookie, a special design at $ 0.50 and the tool cost of $ 100 . Table 3 above shows that a special order is capable of bringing in a profit of $2750 for the corporation, while the order itself would cost $600. According to the findings, if the Cookie firm approves the specified terms for the special order, the firm will lose a total of $1,600. As a result, despite the fact that the firm had a poor month, fulfilling the unique request would erode the month’s meager profits in both a numeric and qualitative sense.

Part 4: Internal Rate of Return

Cookie Business

As the owner of the Cookie Business, you are considering the following investment:

Time

Cash flows

Purchase of new equipment

$ 249500.00

Initial Investment

$ (249500.00)

Expected annual increase in sales

$ 48,017.50

1

$ 48,000.00

Time frame

7

years

2

$ 48,000.00

Acceptable rate needed

8.995%

3

$ 48,000.00

4

$ 48,000.00

Calculate the Internal Rate of Return:

5

$ 48,000.00

PV of annuity factor

$ (243,839.50)

6

$ 48,000.00

Internal rate of return

7.995%

7

$ 48,000.00

Accept or reject

Reject

Internal Rate of Return is an important financial procedure that  helps investors figure out how profitable a project will be by figuring out how quickly the investment return will grow. IRR is important because it uses a discount factor that makes the Net present value of a project zero (Zhevnyak, 2020). Table four above shows how the investment cashflow and the IRR evaluated for the new Cookie business equipment compare to the appropriate  rate required for the new machinery. The calculated IRR is 7.995% lesser than the fair rate of 8.995 % that should be used. Because the business would make more money if it turned down the investment offer, it would make more money

The price of the equipment has been overvalued thereby raising ethical issues. For example, the present value of an annuity was used to figure out the price of the new machinery. It came up with an initial investment of US$243,839.50, which is less than the stated price of $ 249,500 . this shows a difference of US$ 5,661.00.

Part 5: Cash Receipts

Cookie Business

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

$ 200,000

$ 20,000

$ 80,000

Current month’s sales

$ 150,000

$ 245,000

$ 52,000

Total

$ 350,000

$ 265,000

$ 132,000

Financial management relies heavily on the assessment of cash receipts, which is a critical accounting function. Projection of the company’s cash flow over a predetermined time period is part of the cash estimated budget. Based on the firm’s budgeting procedure, the cash budget might be developed on a weekly, quarterly, monthly, or annual basis. The primary goal of a cash budget is to determine if the firm has accrued sufficient funds to support operations for a given time period (Masterov, 2020). The Cookies business generated a total of $350,000, $265,000, and $132,000. For a monthly expense of US$ 150,000, the cash budget shows that January and February brought in enough cash to cover the business ’ needs, with March showing a cash shortfall of US$18,000.

Part 6: Material and Labour Variance

Cookie Business

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

$ (200)

Unfavorable

Materials Quantity Variance

1

Favorable

Calculate Labor Variances:

Labor Rate Variance

$ (1)

Unfavorable

Labor Efficiency Variance

$ (5)

Unfavorable

The ability of managers to assess whether different expenses are beneficial or unfavorable is enhanced by the use of a variety of costing forms. It is important to note that variance refers to the differences between the projected costs and the real expenditure related. As long as the actual cost is lower than the estimated price, the payment is considered advantageous (Marinich, 2019). However, when the variance is negative, it indicates that the real price is larger than the expected budget amount, suggesting that the expenditure is undesirable. In this scenario, the estimated variations for the Cookies Business are comprised of the material and cost variations. From to the table, the material cost variance is $ (200), suggesting that the material cost variation is not favourable in nature. Despite this, the material amount variable is a positive one, indicating that the variation is advantageous. However, the labor variance for both the labor rate and the labor efficiency were undesirable, with negative numbers of one and five respectively.

Recommendation

Because of this, it is suggested that Cookie business management develop goals for employees in the firm to help increase labor efficiency and related labor rate, which are presently in an adverse state. One of the actions could be the implementation of a performance-based compensation strategy to increase the productivity of the workers in the organization  Furthermore, management should develop and implement ways that will enable employees to waste as little time as possible, so raising total productivity, which in turn will increase efficiency, thereby improving the work efficiency of the Cookie business.

Reference

Marinich, E. (2019). Accounting Information Aggregation and Managerial Cooperation. Journal Of Management Accounting Research, 32(3), 193-210. https://doi.org/10.2308/jmar-17-033

Masterov, A. (2020). Management accounting and analysis as tools to improve the investment efficiency in Russia. International Accounting, 23(10), 1121-1148. https://doi.org/10.24891/ia.23.10.1121

Pong, C., & Mitchell, F. (2006). Full costing versus variable costing: Does the choice still matter? An empirical exploration of UK manufacturing companies 1988–2002. The British Accounting Review, 38(2), 131-148. https://doi.org/10.1016/j.bar.2005.09.003

Zhevnyak, A. (2020). Dynamical Internal Rate of Return for the Investment Project. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3742401