4.2 Fudge Delights Inc. Contributed by

Mary M. Oxner PhD, CA, CFA Associate Professor, Gerald Schwartz School of Business, St. Francis Xavier University, Antigonish

Sarah Cameron has loved confections her whole life and as a young girl learned how to make peanut brittle, fudge, and toffee from her grandmother. Sarah has continued the candy-making tradition in her family throughout her life and made fudge at Christmas and other holidays for friends and family and also sold fudge at craft shows and bazaars. Several years ago, Sarah explored the idea of making and selling her own brand of confections on a commercial basis. When the opportunity arose and her business plan allowed, Sarah opened a candy store, Fudge Delights Inc., in which she sells a variety of candies and confections, many of which remind customers of candy they had as kids. In addition to the candy that she buys from suppliers, Sarah makes different flavours of fudge for sale in her store. Because fudge has a rea-sonable shelf life, Sarah can make it in large batches weeks ahead of the time anticipated for sale. Sarahs favourite flavours include classic maple, chocolate chip chocolate, maple walnut, cherries and cream, chocolate mint julep, lemon drop, and toffee almond. From Sarahs perspective, the variety and number of flavours is as large as ones imagination. Sarahs confectionary store has earned a great reputation for premium confections and high-quality fudge, resulting in a 50% increase in sales year over year for the last four years.

There are many ways to make fudge. Sarah uses the same basic technique for all the varieties. To make the fudge, she cooks a sugar syrup to the soft-ball stage, lets it cool for a specified amount of time, and then agitates it until crystals form that are smaller than the original sugar crystals; the agitation is primarily what gives fudge its creamy texture. Sarah does not vary the approach to making fudge but does vary the ingredients to create the different flavours. Currently Sarah does not make custom flavours for customers but might consider doing so in the future if time and demand allow. The fudge is sold in 12-lb. and 1-lb. slabs at a price of $7.00 per 12 lb. or $12.00 for 1 lb. regardless of the flavour of fudge. (Homemade fudge is typically sold by the pound in Canada.)

In Sarahs previous job with a large international soap maker, she learned the need for refined cost information to make good decisions about pricing and profitability analyses of various product lines. Several years ago when Sarah set up her business, she adopted a job-order system for costing the various kinds of fudge. Sarah has been quite diligent about keeping very detailed records for each batch of fudge. Sarah processes all the fudge on-site in small batches by flavour. For each batch, Sarah collects information on the amount of butter, sugar, milk, and other ingredients like chocolate, walnuts, vanilla extract, hazelnuts, and peanut butter. The basic fudge recipe and process is exactly the same for the various flavours of fudge except at the end, when different ingredients are added. The information on each batch is eventually recorded and stored on an electronic index card. The information allows Sarah to best understand the difference in the cost of each batch of fudge. Although the cost information does not affect the selling price of the fudge (because the store policy is to price all fudge at the same price), it does allow Sarah to know which flavours are more costly. Ultimately, this information could result in a flavour being dropped from her product line or sold at a premium price.

With the growth in the business, Sarah has hired an additional fudge maker, Zhanna, and is training her in the art of making fudge that meets Sarahs standards. Zhanna, like Sarah, has made fudge for most of her life. However, unlike Sarah, Zhanna has no affinity for the costing system that Sarah has put in place. Zhanna is questioning whether it makes sense to record the details that Sarah requires. The manual entry of each ingredient added to the batch of fudge takes as much time as making the batch itself. Zhanna is questioning whether the information really is that useful given that the prices are the same and they mostly make batches of their most popular flavours. Sarah has decided to take a second glance at the information she has been collecting during the fudge-making process to ensure the cost data collected provide useful information about overall cost.

The ingredients for making one batch (10 lb.) of fudge for four of the most popular flavours of fudge are shown in Exhibit 1.

Sarah has set up a record-keeping system such that the amount used in each batch is recorded by hand as the ingredient is added. The recording is usually done by entering the ingredient amounts on a card and then using the card to enter the data into an electronic index card and ultimately an electronic spreadsheet. At the end of the month, Sarah reviews the data entry by batch and calculates the total cost of the batch. At the end of the year, Sarah reviews the batch data but does no analysis with the data; however, the possibility of analysis exists because the data are available.

The costs of the ingredients, on average, are in Exhibit 2.

Sarah would like to demonstrate that the cost data collected provide valuable insight into the costs of the various flavours of fudge and would like to be able to justify her use of job-order costing. Sarah knows that the alternative is to adopt a process costing system but is hesitant about changing costing approaches. She wants to have good cost data for decision-making and is hesitant to switch to process costing because she fears a loss of refined data from her costing system and the implications on cost of any changes in ingredients (such as the fluctuation in the price of white sugar last year).

REQUIRED:

Prepare a report (5 pages single-spaced maximum, 12-point Times Roman font) for Sarah Cameron. Your report should be structured with the following headings:

1. Overview 5 marks
   • In this section, provide a summary of the case. Be sure to identify the following: type of business, products manufactured by the company, the price points of the products, and the type of costing system used.

2. Key Issue (s) 5 marks

• • What are the major issues that Sarah Cameron is facing?

3. Analysis 25 marks

• • What is the cost per pound of each of the four most popular fudge flavours produced by Fudge Delights? Show your calculations to justify your answer. The calculation can be submitted separately in an excel document. Please make a note in your report if this is what you choose to do.
  • What is the profitability of each of the four most popular fudge flavours produced by Fudge Delights? Show your calculations to justify your answer. The calculation can be submitted separately in an excel document. Please make a note in your report if this is what you choose to do.
  • Are the differences in the costs and profitability of each of the four flavours of fudge significant? Why or why not? Show your calculations to justify your answer. The calculation can be submitted separately in an excel document. Please make a note in your report if this is what you choose to do.

4. Discussion 10 marks

• • Is Sarahs job order costing system providing any helpful information? Could she have used process costing? If yes, what would have been the advantages of using a process costing system instead of a job order costing system? If no, why not?

5. Conclusions and Recommendation 5 marks

• • Advise Sarah Cameron on whether she should continue with her current costing approach.

- 300 EXHIBIT 1 - INGREDIENTS FOR MAKING ONE BATCH OF THE FOUR MOST POPULAR FUDGE FLAVOURS 10-1b. Batches Classic Maple Classic Peanut Butter Chocolate (c = cup) Walnut Chocolate with Peanuts Turtle Sugar 30C 300 300 Butter 50 56 50 Maple syrup %c Chocolate syrup /c Walnuts Peanut butter 2% Peanuts Caramel 50 2% 1% 1% 1% 1% EXHIBIT 2 - AVERAGE COST OF FUDGE INGREDIENTS Ingredient Lot Size Cost per Lot Size Sugar 100 cups $20.00 Butter 10 cups $20.00 Maple syrup 10 cups $25.00 Chocolate syrup 15 cups $23.00 Walnuts 20 cups $25.00 Peanut butter 20 cups $20.00 Peanuts 20 cups $15.00 Caramel $25.00 25 cups