TRƯỜNG ĐẠI HỌC KINH TẾ QUỐC DÂN

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COST ACCOUNTING

GROUP ASSIGNMENT: COOKIE BUSSINESS

Student Names: Hồ Đức Linh, Nguyễn Phú, Đàm Ngọc Giang Nam

Instructor: Nguyễn Thị Thu Liên

Date: 17/4/2024

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 ABSTRACT

This assignment entails the establishment of a specialty cookie company, "Sweet Craving
Bakery," focusing on the production and sale of a unique type of cookie. The primary objective
is to explore the implications of product costing methods—specifically job order costing and
process costing—on business decisions within the context of a small-scale culinary enterprise.
Through the creation of detailed reports, this study aims to achieve several learning outcomes,
including a comprehensive understanding of product costs (direct materials, direct labor, and
overhead), an examination of job order and process costing, and the application of accounting
data in making business decisions.

The report, structured into four main parts, begins with the establishment of the cookie business,
including the creation of a name, locale, and mission statement, along with the selection of a
specialty cookie for production. The second part delves into costing and sales information,
requiring the preparation of a job order cost sheet for 1,000 cookies and an analysis of process
costing across three key departments: Mixing, Add-ins, and Packaging. A detailed examination
of the Mixing Department provides insight into the cost implications of the production process.

Subsequently, the report compares and contrasts the two costing methods to determine which
offers more comprehensive costing information for managerial decision-making. It discusses the
role of product and conversion costs in both costing systems, highlighting their significance in
accurately assessing production expenses. The fourth part examines the variances in production
costs and revenues, exploring the financial impacts of adjusting the production volume of
cookies.

Concluding remarks synthesize the findings from the analyses, offering insights into the
effectiveness of each costing method in guiding business decisions within the specialized cookie
manufacturing industry. This assignment, incorporating at least three scholarly sources and
supplemented by spreadsheets, aims to not only fulfill academic requirements but also to provide
practical knowledge applicable to the entrepreneurial endeavor of running a specialty cookie
business.

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 TABLE OF CONTENT

I. INTRODUCTION......................................................................................................................3

II. COSTING AND SALES INFORMATION............................................................................4

1. Job order Costing method.....................................................................................................6

2. Process Costing method.........................................................................................................7

III. DIFFERENCES BETWEEN COSTING SYSTEM..........................................................12

1. Compare and contrast the costing methods examined in this project................................12

2. Product costs and conversion costs and their importance in both costing systems...........16

IV. VARIANCES IN PRODUCTION – COST AND REVENUES........................................18

V. CONCLUSION.......................................................................................................................21

REFERENCES............................................................................................................................23

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 I. INTRODUCTION.

In the fascinating world of culinary delights, the charm of a perfectly baked cookie is unmatched.
This group assignment embarks on an entrepreneurial journey to open a specialty cookie
company, Sweet Craving Bakery. Through this venture, we will explore various product costing
methods and how changes in production can influence business decisions. Our aim is to analyze
the implications of job order costing and process costing on our startup and make informed
business decisions based on accounting data analysis.

ESTABLISH COOKIES BUSINESS:

Name Sweet Craving Bakery

Address Asheville, North Carolina

Manufacturing sector Bakery

Types of cookie Chocolate cookie

General information about Sweet Craving Bakery

Business Name and Locale: The venture will be named Sweet Craving Bakery, a boutique
establishment nestled in the heart of Asheville, North Carolina. Asheville is chosen for its vibrant
local food scene, which values organic and artisanal products, making it an ideal setting for our
specialty cookie business.

Mission Statement: "At Sweet Craving Bakery, our mission is to satisfy your sweet tooth with
exquisitely crafted cookies, made from the finest organic ingredients. We believe in the power of
simple pleasures, and our specialty cookies are a testament to our dedication to quality, taste, and
the joy of sharing. Whether you're indulging in a personal treat or sharing with loved ones, Sweet
Craving Bakery aims to make every bite a memorable experience."

Type of Cookie to Sell: After careful consideration, Sweet Craving Bakery has decided to
specialize in Gourmet Chocolate Cookies. This unique offering combines the richness of

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premium dark chocolate with a hint of sea salt, striking the perfect balance between sweet and
savory. Our cookies will cater to both the sophisticated palates of chocolate connoisseurs and
those looking to elevate their snacking experience.

II. COSTING AND SALES INFORMATION

Chocolate cookies are comprised of five primary ingredients: flour, vanilla, sugar, butter, but, for
a specific order from a local café in 2024, chocolate chips/add-ins will be added as the final
ingredient to make a Gourmet Chocolate Cookies. In the production line, these ingredients first
enter the mixing phase where the dough is prepared, followed by the add-ins phase where the
chips is added in the cookie. After that, they move to the final packaging stage. One more about
us, Sweet Craving will wrap each cookie in a decorative plastic bag for marketing plans. The
factory is equipped and capable of fulfilling this order within two days, utilizing its current
machinery and expertise.

The table below shows the ingredients used to make the cookies and the cost of each ingredient:

Material Per 1000 Price

cookie cookies reference

Quantity Price Unit Weight Price Reference

Butter 2g 2000g $33.39 Bag 454g $7.58 Great Value

Sweet Cream
Salted Butter
Twin Pack,
16 oz, 2
Count -
Walmart.com

Sugar 10g 10000g $17.9 Bag 1.81kg=1810g $3.24 Great Value

Pure
Granulated

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 Sugar, 4 lb -
Walmart.com

Vanilla 0.3g 300g $1.75 Bottle 236mL=236g $1.38 Baker's

Imitation
Vanilla
Flavor, 8 fl
oz -
Walmart.com

Flour 12g 12000g $19.05 Bag 907g $1.44 Great Value

All Purpose
Enriched
Flour 2LB
Bag -
Walmart.com

Add-ins/ 5g 5000g $37.42 Bag 326g $2.44 Great Value

cho colate Milk
chips Chocolate
Chips, 11.5
oz -
Walmart.com

Plastic One 1000 $43.2 Pack 100 bags $4.32 100pcs

bag bag bags Food-grade
Cookie
Packing Bags
Clear Plastic
Bags Cookie
Candy Treat
Wrapping
Bags -

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 Walmart.com

(Walmart, 2024)

Baker average salary in USA, 2024:

Employee type Average salary per Average monthly Average rate per hour
year wage

Baker $27062 $2255 $13

(Reference Baker Salary in Asheville, NC: Hourly Rate (April, 2024) (ziprecruiter.com))

1. Job order Costing method.

The job-order costing system begins its process once a company decides to produce a specific
item, either for stock or as a custom order. The main objective of this costing method is to assist
managers in determining the profitability of a job. For effective decision-making, it is essential to
prepare a job order cost sheet. This document should list the job number, the dates of
commencement and completion, the quantity manufactured, the total costs of direct materials and
labor, and an allocated amount for factory overhead. By analyzing the cost sheet, managers can
identify unnecessary expenses and areas of inefficiency.

Presented below is Job order costing sheet for 1000 cookies in April, 2024:

The above diagram details the expenses involved in producing 1000 cookies using the job order

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costing approach. A standard cookie recipe includes four primary ingredients: butter, sugar,
vanilla, and flour, with chips as an optional extra requested by customers. The costs for each
ingredient are listed under the "Direct Material" section. The combined cost of these five
components, along with packaging, for making 1000 cookies is $152.71.

Furthermore, the order requires two bakers, each putting in an 8-hour day. The hourly wage for
each baker is listed as $13 under the "Direct Labor" section, resulting in total cost per employee
is $13 x 8 =$104 and the total labor cost of 2 bakers in 2 days is $104 x 2 x 2 = $416. The
Manufacturing Overhead (MOH) is set at 30% of the direct labor cost which amounts to $124.8.

According to the sheet, the aggregate expense of producing 1,000 cookies amounts to $693.51,
with each cookie costing around $0.69.

Selling price:

To determine an appropriate selling price for the cookies, you would typically consider adding a
markup to the cost price per cookie to cover other expenses and ensure a profit. If each cookie
costs $0.69 to produce, you might decide on a markup percentage based on your business
strategy, target market, and competitive analysis.

For example, if you choose to apply a markup of 30% (a common markup in retail), you can
calculate the selling price as follows:

Selling price = Cost price x (1 + Markup rate) = 0,69 x (1+0.3) = $0.897

Rounded up, the selling price per cookie could be set at approximately $0.9. This markup can be
adjusted based on your specific business needs and market conditions.

2. Process Costing method.

Process costing is a method used in accounting where each unique product or batch isn't treated
individually, but rather the costs are aggregated over a set period across many units. This system
facilitates the assignment of manufacturing expenses to large batches or continuous processes
rather than to specific jobs. In process costing, labor costs are transferred from the production
process to the finished goods as they complete each process stage. This approach simplifies the
cost accounting by not requiring the detailed tracking of costs for each individual product, as is

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necessary in job-order costing. At the end of the accounting period, it is essential to ascertain
both the active and completed units to prepare accurate financial reports, such as the income
statement and balance sheet. Process costing is generally less time-consuming than job-order
costing and offers a practical solution for industries where uniform products are mass-produced.
However, it may sometimes not capture all manufacturing costs, which can lead to financial
discrepancies, particularly if a process experiences unexpected delays, causing a rise in
unaccounted indirect costs.

For our company, using process costing to determine the cost per cookie means allocating costs
across various departments involved in cookie production. Here’s a breakdown of the
responsibilities and cost allocations for the Mixing, Add-ins, and Packaging departments:

1. Mixing Department: This department is responsible for combining the initial

ingredients to create the cookie dough. All materials are added at the start, and the
cookies remain here for 8 hours, reaching 40% completion before moving to the
Add-ins Department.

2. Add-ins Department: This department enhances the dough by adding ingredients

like chocolate chips, nuts,...

3. Packaging Department: This department packages the final cookies, preparing

them for sale.

To allocate direct labor costs and manufacturing overhead costs rationally among the three
departments—Mixing, Add-in, and Packaging—within the cookie manufacturing process, we
have adopted the following assumptions:

Assumptions:

 Mixing Department: This department involves measuring and mixing ingredients such as
sugar, flour, butter, and vanilla. This process might be quite automated but still requires
human supervision to ensure the quality of the mixture.

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  Add-in Department: This department includes adding extras like chocolate chips to the
mix. This process may require high precision and direct labor intervention to handle
minor variations.

 Packaging Department: Packaging the final product into plastic bags. This process is
often highly automated; however, it still requires labor to set up machinery, monitor the
process, and address any issues that arise.

Cost Allocation:

Based on assumptions about automation levels and the necessity for direct labor:

 Direct Labor Costs:

a. Mixing Department: 40%
b. Add-in Department: 35%
c. Packaging Department: 25%

Labor in the mixing and add-in departments typically requires higher skills and more attention
compared to the packaging department.

 Manufacturing Overhead Costs:

a. Mixing Department: 30%
b. Add-in Department: 30%
c. Packaging Department: 40%

Manufacturing overhead might be higher in the packaging department due to a significant need
for machinery and equipment to automate the packaging process, while the other departments
might incur lower costs due to less automation.

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Presented below is the production cost report in Mixing, Add-in and Packaging Department in
April 2024:

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In the Mixing Department, the calculation of the cost per equivalent unit is presented in the
initial table. For this department, the production process starts with 1,000 cookies in April, at a
40% conversion cost, and involves adding four out of the five main ingredients. The remaining
ingredient, chips, is incorporated in the Add-ins Department, where 400 cookies are completed
and transferred out. Consequently, there are 600 cookies remaining in the process by the end of
the period (1,000 - 400), with 40% of these costs assigned to conversion costs and 100% to
materials. In this phase, the Mixing Department incurs a total direct materials cost of $72.09
(Direct materials total $152.71 minus $37.42 for chips and $43.20 for plastic bags), with no
initial work-in-process (WIP) costs. Thus, the cost per equivalent unit for direct materials is
calculated at $0.072 ($72.09 /1,000 units).

Labor and overhead costs are computed in a similar manner, resulting in a cost per equivalent
unit. The labor cost totals $166.4, derived from 40% of the total direct labor cost of $416, while
the overhead expenses amount to $37.44, equating to 30% of the total overhead of $124.8. Given
that 400 units are completed and 600 are partially processed (40% complete), the total equivalent
units for labor and overhead are 640 units (400 + 240). This results in per unit labor costs of
$0.26 ($166.4/640) and manufacturing overhead costs of $0.059 per unit ($37.44/640).

Therefore, the comprehensive cost per equivalent unit in the Mixing Department totals $0.391,
with $0.072 for direct materials, $0.26 for labor, and $0.059 for overhead.

In the Add-in Department, the direct materials cost totals $37.42, allocated across 1,000
equivalent units with no beginning WIP costs, resulting in a unit cost of $0.037 ($37.42/1,000).
Labor costs in this department reach $145.6, calculated as 35% of the $416 total labor cost, and
overhead is $37.44, again 30% of $124.8. The unit costs for labor and overhead are $0.228
($145.6/640) and $0.059 ($37.44/640) respectively, bringing the total cost per equivalent unit to
$0.323.

In the Packaging Department, the incurred direct materials cost is $43.20, spread across 1,000
units without any beginning WIP, yielding a unit cost of $0.043 ($43.20/1,000). The labor and
overhead costs, derived similarly, are $104 (25% of $416) and $49.92 (40% of $124.8)
respectively. This gives unit costs of $0.163 for labor and $0.078 for overhead, resulting in a
total cost per equivalent unit of $0.284.

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The cumulative cost per cookie from all departments amounts to $0.998 ($0.391 + $0.323 +
$0.284). Therefore, the cost for 1,000 cookies is estimated at $998 ($0.998 multiplied by 1,000).

III. DIFFERENCES BETWEEN COSTING SYSTEM

1. Compare and contrast the costing methods examined in this project.

The distinction between job order costing and process costing is vital to understand how each
method affects business decision-making, especially in a small-scale culinary enterprise that
specializes in unique cookie production.

In the context of "Sweet Craving Bakery," JOB ORDER COSTING emerges as a particularly
relevant and functional methodology for capturing the nuances of custom cookie production.
This system shines when the product offerings are specialized and varied, allowing for
meticulous financial oversight and targeted pricing strategies. Below is an expanded analysis of
how job order costing impacts various facets of the business.

Precision and Customization: Job order costing serves as the financial lens through which "Sweet
Craving Bakery" scrutinizes each customized order. Its precision is not merely about tracking
costs; it's about understanding the unique requirements of each batch of cookies. Customization
here extends beyond the baking process to encompass the cost analysis. The detailed cost sheet
for 1000 custom cookies demonstrates the bakery's ability to determine the financial inputs
required down to the gram of chocolate chips added. This high-resolution financial imagery
allows for each order to be assessed for its individual contribution to the bakery's profitability,
akin to assessing the financial 'DNA' of each batch.

Cost Tracing: The project's data exemplifies how direct costs are not lumped together but are
instead assigned to specific orders. This direct tracing method is not simply about logging
expenses; it's about constructing a narrative that tells the story of each order's journey from raw
materials to the final product. For instance, tracing the labor costs of bakers doesn't just account
for their time; it reflects the skill and artistry involved in crafting each cookie. The granularity of
this method ensures that every ounce of butter and every hour of labor is accounted for,
providing a comprehensive view of what each custom order entails financially.

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Inefficiencies and Variance Analysis: Job order costing is not just about accounting for costs; it's
about managerial scrutiny. It empowers managers to perform surgical financial analyses to
identify where inefficiencies lie—whether in the overuse of vanilla extract or in labor hours that
exceed the norm. This method serves as a diagnostic tool, enabling the bakery to make data-
driven decisions that refine production processes and cost management strategies. By conducting
variance analysis, the bakery can compare expected costs to actual costs, thus identifying
discrepancies that may indicate inefficiencies. For example, if the cost of sugar spikes
unexpectedly, job order costing can help to pinpoint the variance quickly and take corrective
action, such as negotiating better prices with suppliers or adjusting the recipe slightly to maintain
profitability without sacrificing quality.

Administrative Considerations: While the merits of job order costing are numerous, it is also a
system that requires significant administrative bandwidth. Every custom order becomes a mini-
project, necessitating detailed tracking and documentation. This intensity of administration can
strain the resources of a small-scale business like "Sweet Craving Bakery." The investment in
time and administrative efforts must be balanced against the insights and control that job order
costing provides. The bakery must consider whether the granularity of data it gains is worth the
potential trade-off in operational agility and administrative overhead. If the bakery's product line
grows or becomes more complex, the administrative demands of job order costing will grow
correspondingly, potentially necessitating an investment in more sophisticated accounting
software or additional personnel.

Job order costing for "Sweet Craving Bakery" stands as a cornerstone of its financial strategy,
integral to maintaining the delicate balance between artisanal quality and economic viability. It's
a detailed system that, while administratively demanding, offers the bakery precision and
control, enabling it to flourish as a purveyor of customized culinary delights. It aligns closely
with the bakery's mission to deliver not just cookies but crafted experiences, each with its distinct
financial imprint, ensuring every ingredient and every minute of oven time contributes to the
bakery's success.

PROCESS COSTING is an accounting method particularly suited to the manufacturing

processes of "Sweet Craving Bakery," where standardized batches of cookies are produced.

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Unlike job order costing, which is ideal for custom, unique orders, process costing comes into
play when the bakery produces large volumes of cookies that do not vary significantly from one
batch to another. Here's a detailed analysis of how process costing benefits and challenges a
business like "Sweet Craving Bakery."

Efficiency in Mass Production: The essence of process costing lies in its efficiency for mass
production. In the setting of "Sweet Craving Bakery," which might produce thousands of
uniform cookies, tracking the cost of each cookie individually would be impractical and time-
consuming. Process costing aggregates the costs and spreads them out over all units produced
during a period, thereby providing a cost-effective and streamlined approach to accounting.

This efficiency is not just about reducing the workload for accounting but also about enabling
scalability. As "Sweet Craving Bakery" grows and increases its output, process costing will
allow it to maintain a consistent approach to costing without proportionally increasing the
complexity or the cost of its accounting processes.

Simplification of Costs: In contrast to job order costing, which necessitates a meticulous record
of every cost element, process costing adopts a more holistic view. Costs are compiled over a set
period, and each unit produced is assigned an average cost. This method simplifies both the
costing and pricing processes. For the bakery, this could mean less time spent on accounting and
more on production and innovation. This simplification also extends to inventory management.
Process costing can provide a clear view of the cost of goods sold and ending inventory without
the need to trace specific costs to individual units, making it easier to manage inventory levels
and predict future costs.

Broad Allocation: The allocation of costs in process costing is based on departmental output and
activities. This broad allocation has implications for both cost control and managerial decision-
making. For instance, "Sweet Craving Bakery" might use the cost data from the Mixing
department to determine if a new mixing machine could make the process more cost-effective,
justifying the capital investment.

However, while this broad allocation simplifies accounting, it may obscure the cost implications
of individual tasks or batches. For example, if there is a temporary spike in the cost of sugar,

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process costing would average this out over the entire production. This could mask the impact of
such fluctuations on the profitability of specific batches produced during that time.

Challenges and Limitations: While process costing offers many benefits, it is not without its
challenges. One of the primary limitations is the potential dilution of cost detail. Because costs
are averaged, the ability to conduct a detailed analysis of the cost structure of individual batches
is limited. If the bakery experiences inefficiencies in one batch or department, these may not be
immediately apparent from the process costing reports. Furthermore, unexpected delays or
production issues can lead to inaccuracies in cost allocation. If the Mixing department
experiences downtime, the cost per unit for that period may be higher. However, if the bakery
continues to allocate costs based on standard operating times, these increased costs might be
overlooked, potentially leading to underpricing of the cookies and reduced profitability.

Process costing aligns well with the operational realities of "Sweet Craving Bakery" when it
comes to standard cookie production. It offers a cost-accounting structure that can support the
bakery as it scales up production while maintaining a clear and manageable accounting process.
However, it is essential for the bakery to recognize the limitations of process costing.
Supplementing it with other managerial accounting tools, such as variance analysis or activity-
based costing for specific activities, could help mitigate some of its shortcomings. By doing so,
"Sweet Craving Bakery" can ensure that it captures sufficient cost detail to inform its decision-
making while enjoying the efficiencies that process costing provides. In the end, process costing
is a valuable tool in the bakery's accounting arsenal, enabling it to produce its delectable treats on
a scale that meets consumer demand, while maintaining a watchful eye on the cost implications
of its production processes.

Which costing method gives more complete costing information, and why?

The term "complete" in costing information refers to the depth and breadth of the data provided
about the costs incurred in production. Completeness encompasses not only the precision of the
data but also its relevance and usefulness in making informed business decisions.

For customized orders and detailed cost tracking, job order costing provides more complete
information. It allows "Sweet Craving Bakery" to capture the unique cost elements of each batch
of cookies, which is essential when producing to meet specific customer demands. For

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standardized, mass-produced goods, process costing provides sufficient completeness. It offers
an averaged-out cost that is appropriate for the bakery's routine production processes, where each
unit is essentially the same.

In the case of "Sweet Craving Bakery," because the goal is to determine the exact cost of
producing a specialized batch of cookies (such as an order with unique add-ins), job order
costing would provide more complete costing information due to its detailed approach to
tracking the cost of each item used and each hour worked.

2. Product costs and conversion costs and their importance in both costing systems.

For a business like "Sweet Craving Bakery," understanding and managing product costs and
conversion costs are crucial for effective financial oversight and operational efficiency. Both job
order costing and process costing systems use these cost categories, but they apply and interpret
them in slightly different ways depending on the production method and business objectives.

- Product Costs: Definition and Components:

Product costs, also known as inventoriable costs, are expenses directly incurred from the
manufacturing process. These costs are capitalized as inventory on the balance sheet until the
product is sold, at which point they are expensed as the cost of goods sold (COGS) on the
income statement. Product costs typically include:

 Direct Materials: These are the raw ingredients used in the production of goods. For
"Sweet Craving Bakery," direct materials include flour, sugar, butter, eggs, and any
specific add-ins like nuts or chocolate chips that are directly traceable to the production
of cookies.

 Direct Labor: This encompasses the wages and other related costs for personnel directly
involved in the manufacturing process. In the bakery's context, this would be the bakers
who mix, shape, and bake the cookies.

 Manufacturing Overhead: This includes all the costs associated with production that
are not directly traceable to a specific product but are necessary for the manufacturing

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 process. Examples include depreciation on equipment, rent for the production facility,
utility costs, and maintenance expenses.

- Conversion Costs: Definition and Significance:

Conversion costs are a subset of product costs that refer specifically to the costs necessary to
convert raw materials into finished goods. They include:

 Direct Labor: As noted above, this is part of both product and conversion costs.

 Manufacturing Overhead: These costs are also a crucial part of conversion costs
because they support the conversion process.

Conversion costs are particularly important as they help management analyze the efficiency of
the production process. Monitoring these costs allows businesses to identify areas where
production processes can be improved, which can lead to cost savings and increased
productivity.

- Importance in Job Order Costing and Process Costing:

In Job Order Costing:

 Product Costs: Each component of product costs is meticulously tracked and allocated to
each specific job. This level of detail helps "Sweet Craving Bakery" ensure that each
custom order is priced accurately based on the actual costs incurred, which is crucial for
maintaining profitability on a per-order basis.

 Conversion Costs: Analyzing conversion costs in job order costing helps in assessing the
efficiency of labor and overhead utilization on a per-job basis. It allows the bakery to
make adjustments for future estimates and improve cost management strategies for
individual orders.

In Process Costing:

 Product Costs: These costs are averaged out across all units produced during a period.
This approach simplifies inventory valuation and cost of goods sold calculations, which

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 is beneficial for standard, repetitive processes. It ensures consistency and predictability in
costing large volumes of similar products.

 Conversion Costs: In process costing, understanding conversion costs across different

departments (e.g., Mixing, Baking, Packaging) helps in pinpointing departments where
inefficiencies might be occurring. This can inform decisions on process improvements
and capital investments in automation or training.

Strategic Implications

For "Sweet Craving Bakery," managing product and conversion costs effectively is key to
competitive pricing strategies and operational excellence. In both costing systems, these costs not
only affect financial reporting and profitability but also influence strategic decisions regarding:

 Product Development: Deciding whether to introduce new cookie varieties.

 Process Innovation: Investing in more efficient equipment or methods to reduce

conversion costs.

 Pricing Strategies: Adjusting prices based on the detailed cost analysis to remain
competitive while ensuring profitability.

Both product and conversion costs play pivotal roles in the costing systems employed by "Sweet
Craving Bakery." Whether through job order costing for custom orders or process costing for
standard products, understanding these costs in depth allows the bakery to enhance financial
accuracy, optimize production processes, and ultimately achieve business sustainability and
growth.

IV. VARIANCES IN PRODUCTION – COST AND REVENUES

Analyzing the implications of production volume changes under both job order costing and
process costing (in the Mixing Department) systems requires understanding how each system
handles the variable and fixed costs associated with production changes.

JOB ORDER COSTING SYSTEM

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In job order costing, costs are tracked and allocated to individual orders. Changes in production
volume directly influence both total and unit costs:

Decrease to 500 Cookies:

 Direct Materials and Direct Labor: These costs will decrease proportionally with the
reduction in production volume. However, because these costs are variable, the per-unit
cost remains constant unless there are efficiencies or inefficiencies that affect the unit
cost.

 Manufacturing Overhead: Fixed overheads remain constant, leading to a higher per-

unit overhead cost when spread over fewer units. Variable overheads decrease with the
lower production volume, but the decrease might not be proportional, depending on the
nature of the expenses.

Increase to 1,500 Cookies:

 Direct Materials and Direct Labor: Costs increase proportionally. With higher
volumes, the bakery might achieve some economies of scale, potentially lowering the
per-unit cost of these variables.

 Manufacturing Overhead: While fixed overheads remain constant and spread over
more units (reducing per-unit cost), variable overheads increase. The overall effect could
be a lower per-unit cost if the increase in variable overheads doesn't offset the spread of
fixed costs.

Revenue Impact:

 Decrease in Production: Likely leads to lower total revenue unless prices are increased.
However, the increase in unit cost could squeeze profit margins unless offset by a price
increase.

 Increase in Production: Potential for higher total revenue. If unit costs decrease,
profitability per unit may improve, offering the opportunity to either increase profit
margins or competitively price the cookies to increase market share.

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PROCESS COSTING SYSTEM

Process costing averages costs over a period, making it less sensitive to changes in individual
batch sizes but still impacted by total production volume changes.

Decrease to 500 Cookies:

 Unit Costs: Likely to increase as fixed costs are now spread over fewer units. This
dilution of fixed cost absorption can significantly raise the average cost per unit.

 Efficiency: Reduced volumes may lead to under-utilization of capacity, increasing idle

time and potentially increasing the per-unit cost further.

Increase to 1,500 Cookies:

 Unit Costs: Generally, average costs will decrease as more units absorb the fixed costs.
This can lead to improved efficiency and lower per-unit costs, assuming variable costs
scale appropriately.

 Economies of Scale: Increased production can optimize the use of resources, reducing
waste and potentially lowering variable costs like energy per unit of production.

Revenue Impact:

 Decrease in Production: Reduces potential revenue and may harm profitability per unit
due to higher average costs unless prices are adjusted upward.

 Increase in Production: Increases potential revenue and could improve profit margins
through lower average costs. This might also provide flexibility in pricing strategies to
enhance competitive positioning.

STRATEGIC CONSIDERATIONS

Sweet Craving Bakery must consider the flexibility of its production processes and its ability to
adjust pricing strategies in response to cost changes. Key strategies include:

 Cost Management: Regular review of cost structures to identify inefficiencies,

especially when production volumes change.

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  Pricing Flexibility: Ability to adjust prices in response to cost per unit changes without
alienating customers.

 Market Demand: Alignment of production volumes with market demand to prevent

overproduction or shortages.

Understanding how both job order costing and process costing react to changes in production
volumes is crucial for managing costs effectively. For "Sweet Craving Bakery," the choice of
system may depend on the nature of the production order (standard vs. custom) and the ability to
manage the costs associated with each system under different production scenarios.

V. CONCLUSION

This comprehensive analysis of Sweet Craving Bakery's costing methods reveals the significant
impact that accounting strategies can have on business decision-making, particularly in the
context of a specialized culinary enterprise. Through the implementation and comparison of job
order costing and process costing, we've unearthed insights that not only shape financial
management but also inform strategic business directions.

Key Takeaways from Our Analysis:

1. Efficacy of Costing Methods:

 Job Order Costing: Proved invaluable for custom orders at Sweet Craving
Bakery, offering precision in cost tracking and aiding in meticulous financial
management. This method enabled the bakery to capture unique cost elements for
each batch, providing a granular view that is crucial for pricing and profitability
analysis.

 Process Costing: Best suited for the bakery's standardized production processes,
this method simplified the costing process by averaging costs over a period, thus
supporting scalability and efficiency in mass production. It ensured consistent
costing across batches, essential for maintaining predictable financial outcomes.

2. Strategic Financial Insights:

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  The detailed examination of costs in both methods highlighted the importance of
understanding both product costs (direct materials, labor, and overhead) and
conversion costs. These insights are critical for managing production efficiency
and optimizing cost structures.

 Variance analysis under job order costing allowed for the identification of
inefficiencies and cost overruns, providing a clear path for operational
improvements and cost-saving measures.

3. Business Decision Support:

 Comparing and contrasting both costing methods helped delineate their

appropriateness depending on the production scenario—customized vs. standard
production. This understanding supports strategic decisions regarding the
adoption of new technologies, scaling of production, and potential market
expansion.

 Financial forecasts and analyses based on these costing methods aid in setting
competitive pricing strategies and managing profitability effectively, ensuring the
sustainability of the business.

Conclusive Thoughts:

The choice between job order and process costing is not merely a financial decision but a
strategic one that aligns with the business’s operational goals and market demands. For Sweet
Craving Bakery, employing both methods in different contexts maximizes financial clarity and
supports strategic business decisions. As the bakery continues to grow and evolve, the flexible
application of these costing methods will be essential in adapting to new challenges and seizing
market opportunities.

In conclusion, our case study not only fulfills academic criteria but also provides Sweet Craving
Bakery with actionable insights and a robust framework for future financial and operational
strategies. This dual approach to costing ensures that the bakery is well-prepared to meet its
mission of delivering high-quality, memorable culinary experiences to its customers while
maintaining financial health and fostering business growth.

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 REFERENCES

For books - "Cost Accounting: A Managerial Emphasis" by Charles T. Horngren, Srikant M.

Datar, and Madhav V. Rajan:

- "Managerial Accounting" by Ray Garrison, Eric Noreen, and Peter Brewer:

- "Baking Science & Technology" by E.J. Pyler and L.A. Gorton:

For - The Journal of Cost Analysis and Management:

journals
- International Journal of Production Economics:

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For
- Baker salary: Baker Salary in Asheville, NC: Hourly Rate (April, 2024)
electronic
(ziprecruiter.com)
sources

- Ingredient price: walmart.com

- Investopedia (Job Order Costing):

https://www.foodbusinessnews.net/articles/8390-focus-on-ingredients-prices-in-
baking-industry

- Accounting tools (Process Costing):

https://www.foodbusinessnews.net/articles/8390-focus-on-ingredients-prices-in-
baking-industry

- The balance small business (Guide to selling cookies):

https://www.thebalancesmb.com/home-business-selling-cookies-1794532

- Food business new (Ingredients and receipts):

https://www.foodbusinessnews.net/articles/8390-focus-on-ingredients-prices-in-
baking-industry

- Production cost: https://www.accountingcoach.com/blog/what-are-production-costs

- Conversion cost:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/conversion-
costs/

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