MGMT of Accounting Unit 3 Project

Cookie Business

Assignment objective: 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:

Length: You will prepare a four- to five-page written report (including spreadsheets) using the

Unit III Project Template

.

References: A minimum of 2 peer-reviewed references are required, any additional resources used are required to be scholarly/academic in nature and found in the CSU Library. APA formatting is required be used for citations and references. Use this definition to define the term in the instructions.

Definitions: Scholarly journals are sometimes called academic journals. The terms are often used interchangeably to describe the same type of publication. These types of publications are published by universities, academic institutions, professional associations, and commercial enterprises and are compiled by scholars, academics, and other subject authorities.

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.

Part 2: Develop costing and sales information for 1,000 cookies (this is the first and only order).

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

Unit III Cookie Project Spreadsheet Templates

for your job order, and process costing spreadsheets to be embedded in your case study document.

UNIT III STUDY GUIDE
Cost-Volume-Profit and
Variable Costing
Course Learning Outcomes for Unit III
Upon completion of this unit, students should be able to:
2. Apply accounting concepts to the creation of accounting information and reports.
2.1 Prepare cost-volume-profit analysis reports.
3. Analyze accounting information used to make strategic business decisions.
3.1 Compare and contrast full (absorption) and variable costing.
Required Unit Resources
Chapter 4: Cost-Volume-Profit Analysis, pp. 4-1 – 4-27
Chapter 5: Variable Costing, pp. 5-1 – 5-13
Unit Lesson
Introduction
Welcome to Unit III. In this unit, we will be looking at cost-volume-profit analysis and how this is related to
several key management tasks; planning, controlling, and decision-making. In this unit, we will also look at
how the costs we have identified (variable and fixed) are reported under both full (absorption) and variable
costing and how inventory levels effect net income under both of these methods.
Cost Identification
Variable costs and fixed costs: We are going to start off with a short review of variable and fixed costs and
how these costs change in total and per unit. Remember, fixed costs remain the same in total regardless of
the level of production while the per unit cost decreases as more units are produced because those fixed cost
are spread over more items.
Variable costs, remember, will increase or decrease in total with the level of production while the per-unit cost
remains the same. This is because the more units that are produced, the more it will cost the company in total
for those units, but each unit still costs the same amount regardless of how many are produced.
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Mixed costs: We are going to add to our previous cost
discussion the idea of mixed costs. These costs, as
the name implies, have an element of both fixed and
variable costs. As you can see from the chart, there is
a fixed cost of $200 per week, but the more units
produced above a certain level would allow the
employee to receive additional pay for those
additional units (variable costs). For example, let’s say
you receive a base salary of $200 per week for up to
10 units produced, and in addition to that base salary,
you receive an additional amount if you produce more
than the 10 items. In this example, if you produce 20
items, you still receive your $200 (fixed amount) plus
an additional $200 (variable amount) for a total of
$400 that week. As you can see, the more you
produce, the more money you will make. Regardless
of the number of items you produce each week, you
will still receive the $200 base pay per week.
Why is it important to know the classification for the various costs within a company? It is important so that
managers can properly estimate the costs and perform a cost-volume-profit analysis. Keep in mind, most
managers within the company only have control over their own department or unit. Therefore, costs involved
in the negotiation of the rent contract for the factory would not be within the authority of the factory floor
supervisor. The factory floor supervisor would, however, have control over the effectiveness of his or her
workers and the efficient use of materials needed to make products within his or her department.
Cost-Volume-Profit Analysis
A cost-volume-profit analysis is an evaluation method that looks at the relationship between the level of
activity within the organization, the costs within the organization, and the profit of the organization (Jiambalvo,
2020). The basic equation to determine profit is:
Sales – Costs=Profit
Taking this equation one step further when dealing with cost-volume-profit analysis is:
(Selling price per unit * number of units sold) – (Variable costs per unit * number of units sold) – Total fixed
= Profit
ACC 5301, Management Applications of Accounting
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As you can see by expanding our basic equation, we now take into account the
number
of units
sold and
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break down our costs by variable and fixed costs. This leads us to a couple ofTitle
important calculations related
to cost-volume-profit analysis, break-even point, and
contribution margin.
Break-even point: One important use of a cost-volumeprofit analysis is to determine the break-even point.
This allows managers to calculate out how many
products or dollars they need to sell so they do not
make money, but they do not lose money. In other
words, this helps guide production for the company. If
the company sells above the break-even point (where
costs and revenue meet), it will make a profit, but if it
sells below the break-even point, then the company
will incur a loss. The chart to the side shows the
relationship between fixed and variable costs as well
as sales revenue. As you can see, the break-even
point is where sales and costs intersect on the chart.
Contribution margin: Another important calculation in this unit is the contribution margin. This calculation
shows how much of a “contribution” a product is making per unit to income based on variable costs only. This
means that fixed costs are not calculated into the equation. The calculation is:
Selling price per unit – Variable cost per unit = Contribution margin
For example, if a product sells for $100 but costs $60 to make, the contribution margin in $40 per unit. Keep
in mind, this calculation does not include fixed costs (like rent, CEO’s salary, etc.). The contribution margin
does give the managers a basic idea if they are selling the product for more than the cost to make it.
Remember, a company may make more than one product or provide more than one service, so this technique
can be used for each product or service to make sure each one is profitable.
By using the cost-volume-profit techniques, a manager can determine how many products to make in order to
break even (no profit or no loss) and determine if the product or products the company sells are selling above
the cost to make the product, the contribution margin. By using just these two techniques, managers can plan
how many products to make, control the cost to make those products, and make decisions that will allow the
company to be profitable.
Full (Absorption) and Variable Cost Reporting
Looking at our other topic for this unit, full (absorption) and variable cost reporting, we are going to compare
and contrast these two reporting methods. Let’s first look at the format of the two reports as pictured below
(Jiambalvo, 2020):
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Both reports show sales, costs and net income. The difference between the two reports is how the
variable and fixed costs are displayed on the reports. On full or absorption costing, fixed and variable costs
are not broken down; the costs are all included in total regardless of their status as fixed or variable costs.
Keep in mind, this is the only reporting method that is acceptable for GAAP (Generally Accepted
Accounting Principles) for external reporting. This means that if the company needed to prepare a statement
for a governmental or regulatory agency or even a bank to get a loan, it would need to report using
absorption costing.
However, as a manger, full (absorption) costing does not break down the costs into fixed and variable costs.
In other words, as we noted previously, a manager has more control over variable costs, and full costing does
not show the breakdown of costs that would enable a manager to better plan and control costs. Looking at
variable costing, you can see that, while the information is the same, there is a clear breakdown of the
variable and fixed costs. Managers can now look to see how they can better control costs within their
responsibilities. For example, we noted that the factory supervisor typically does not have control over fixed
costs such as rent. By using the variable costing statement, the factory supervisor can clearly see which costs
he or she can control (variable costs) and find ways to minimize these costs.
Effects of Production on Cost Reporting
In our example above, we assumed that all 4,000 units produced were sold. This is why net income for both
full (absorption) and variable costing showed the same amount. Now, let’s take a look at what happens when
inventory increases or decreases under variable costing. In this first example, only 3,800 units were sold, so
that left 200 units in inventory unsold. The chart below shows the effect on net income when not all of the
units produced are sold. As you can see, the net income under variable costing is less than the net income
under full (absorption) costing.
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In our final example below, when the company sells more than it produces, in this case 4,200 units, net
income for variable costing is higher than the net income for full (absorption costing). This means that the
company is selling units that were left in inventory from a prior month.
Conclusion
In this unit, we have discussed cost-volume-profit techniques that are useful to managers for planning
production and sales, controlling costs, and making decisions. The two main techniques we have looked at
are calculating break-even and contribution margin. These calculations provide managers the tools they need
to not only look at how many items they should be producing but also what it is costing them to produce
those products.
This unit also looked at the two different costing reports; full (absorption) and variable costing. As we
discussed, these two methods have advantages and disadvantages. For example, while variable costing
makes it clearer to see the breakdown between variable and fixed costs, variable costing can also be used to
manipulate income based on changes in inventory levels.
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Reference
Jiambalvo, J. (2020). Managerial accounting (7th ed.). Wiley.
https://bookshelf.vitalsource.com/#/books/9781119577706
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Suggested Unit Resources
View the following video by accessing the Unit III Additional Unit Resources folder in the unit.
The video Whole Foods: Cost-Volume-Profit Analysis will demonstrate how cost-volume-profit analysis
techniques can be used at Whole Foods.
You can access a transcript for this video by hovering over the PDF button at the bottom of the video and
then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video
to turn on closed captions.
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit
them. If you have questions, contact your instructor for further guidance and information.
After watching the video Whole Foods: Cost-Volume-Profit Analysis in the Suggested Unit Resources, you
may want to answer the three questions in the Unit III Questions resource . Note that the “View the Video” link
referenced in each question is the same Whole Foods: Cost-Volume-Profit Analysis video linked above.
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This document was exported from Numbers. Each table was converted to an Excel worksheet. All other
objects on each Numbers sheet were placed on separate worksheets. Please be aware that formula
calculations may differ in Excel.
Numbers Sheet Name
Numbers Table Name
Job Order
Table 1
Process Costing
Table 1
Sheet3
Table 1
s converted to an Excel worksheet. All other
orksheets. Please be aware that formula
Excel Worksheet Name
Job Order
Process Costing
Sheet3
Job Order Cost Sheet
Job number:
Direct Material
Direct Labor
Total Cost per
ingredient
Ingredients
Date
Hours
Total
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Units
Cost per unit
Rate
Total Cost per
employee
–
1,000
–
3
Manufacturing overhead
Total Cost
–
4
Production Cost Report
Department:
Cost:
Beginning WIP
Cost incurred
Total
Material
Labor
Overhead
Units:
Units Completed
Equivalent Units (ending
WIP)
Total
Cost per Equivalent unit
5
Trans In
e>
Total
6
7
1
Title of the Paper Goes Here
Student Name
Institution
ACC 5301 Management Applications of Accounting
Instructor
Date
2
Abstract
The Abstract is an overview of the paper, written after completion. Other researchers use the
abstract to determine if your work will be useful to them. The abstract should include the
background, hypothesis or research question, methodology for data collection and analysis, the
findings of your research, and conclusions. It should be between 100–150 words. This is done
when the paper is complete.
3
Title of Paper
Remember this part of the paper is double spaced in APA format.
The Introduction should lead readers into the topic and its importance. Introductions
typically include the overall topic of the paper, the specific focus of the paper within the larger
topic, the main points in the paper, the kind of paper (study, argument, critique, discussion), and
the purpose.
Writing tip: The length of the introduction should be in proportion to the length of the
paper. Also ask yourself, “With my purpose and my audience, how do I engage my readers
best?” In the introduction, you set the tone of the piece, establish your voice, and demonstrate
your writing style; be authentic to your purpose and your audience.
Part 1 Establish Cookie Business
Identify the name of your company, location, mission statement for your business, and
type of cookie you plan to make. Keep in mind that you are only making one type of cookie for
this project.
Part 2 Costing and Sales Information
Analyze and discuss the estimated cost per cookie using job order costing, the estimated
cost per cookie using process costing, and the estimated sales price per cookie. Embed your
spreadsheets to justify your costs.
Part 3 Compare and Contrast Costing Methods
Analyze and discuss the major differences you see between the types of costing. Which
do you believe is more useful for this business, and why?
Part 4 Impact of Increase and Decrease in Sales
Discuss what will happen to revenue if the number of cookies sold increases or decreases.
4
Conclusions and Recommendations
The Conclusion section should summarize for the readers the topics of importance that
led to your final conclusions/analysis regarding this case. Include some specific areas of focus
from your analysis to reinforce your conclusion.
5
References
Include complete references in proper APA format for all of the citations listed in your
paper. Be sure to use the library for the required number of sources. Additional sources can be
used but should be scholarly. Present your references in alphabetical order.