Business Background Rich watched his mom making cakes for the Jewish holidays since he was a kid. He even faked being sick so he could stay home and smell the delicious aroma of cinnamon, brown sugar and the yeast dough as it came out of the oven. Lots of people in the neighborhood came over before the holidays to put in their orders. Mom had learned from her mom and had all the recipes written on 3 x 5 index cards in case Rich or his brother wanted them. Rich's dad encouraged him to become an accountant because a profession would provide a solid income and career opportunities. The problem is, he hated Accounting. Well, maybe hate is too strong a word, but it wasn't what he enjoyed doing. He was a cook One day in Managerial Accounting class, Rich made a decision. He was going to quit school at the end of the semester and open up a bakery specializing in his mom's cakes. He anticipated that most of his business would be based on special order, customized cakes. He figured he could service family weekend gatherings, birthday and weddings celebrations, and, of course, the Jewish New Year celebrations. Although most of the baking would be to order, he would maintain a limited inventory for drop in customers. In December of 2016, he left school, created a business plan, and incorporated S&S Bakery. The plan was to open for business on January 1, 2017. He would use the $50,000 his dad left him when he passed away two years earlier as start up capital and pay himself a minimum salary of $500 month for the first year. His friend Maria, a marketing executive with her own firm, agreed to provide marketing support for a cake a year He found a location in Valencia close to a well known Hebrew school. The storefront was on Copperhill Drive, a busy street with a Starbucks and several restaurants. The landlord was impressed with his initiative and agreed to pay for all the leasehold improvements and charge $600 a month. Cost Classification (Assignment #1) The first item on his schedule was to list all the key products or items that he would need to start the business. His list included a conventional oven, a cash register, baking pans, butter, eggs, health inspection, business licenses, flour, sugar, baking soda, raisins, and cinnamon. His daughter Michelle and his niece Jennifer offered to help in the bakery. His friend Fern offered to supervise the girls so he could focus on business development. S & S's cost drivers are provided in Table #1. Required: Rich needs your help in classifying the various costs. He provided the information below to assist you in the identification. Use Table 2 for your answers. a) Behavior (fixed or variable) b) Traceability (direct or indirect) c) Financial reporting (product or period) d) If product cost, identify which items are direct materials, direct labor or manufacturing overhead. Costing System (Assignment #2) Rich's friend Adrian agreed to help out by providing part time accounting services. They agreed that it was imperative for the business to have a budget. Rich wasn't up on the various costing methods that exist. Adrian told him the three different types of costing systems were - job order, process costing and activity based costing. Required: Which type of costing system best suits S & S Bakery? Why? Business Transactions (Assignment #3) Rich spent the month of December talking to various suppliers in order to determine his cost structure. The results are listed in Table #1. S&S opened on time in January. During the month they used 200 pounds of flour, 200 pounds of sugar, 67 dozen eggs and had 4 bad eggs to dispose of during the month (the cost of the eggs is immaterial), 20 baking soda boxes, 200 pounds of butter, 100 pounds of raisins, and other ingredients (one box of each for a total of three) all from one supplier on account. Manufacturing overhead is applied to production at $4 per cake. Rich purchased the oven using the startup capital and paid all the salaries. The girls worked 300 hours in total for the month. The first month was very good for the bakery as they baked and sold 200 cakes for cash. The average price was $50 per cake. All manufacturing overhead is closed out at the end of the month. The supplier was paid, in full, at the end of the month also. Required: Document the bakery's transactions using T-accounts (round all calculations to 2 decimals). All other costs such as utilities must be accounted for in the T-accounts (assume such transactions where applicable, are paid in cash). Reporting (Assignment #4 to be completed in Excel) Rich doesn't want to see journal entries and T-accounts. However, he is interested in seeing a Statement of Cost of Goods Manufactured. He thinks a business owner should see the information that way. Required: Prepare the Statement of Cost of Goods Manufactures for January. Also, prepare an Income statement for the month of January Breakeven Analysis/Target Sales (Assignment #5 to be completed in Excel) Although business was off to a great start in January, Rich realized that he would need to be profitable in order to continue as a viable business. He discussed the subject of profitability with Adrian who suggested that he needs o determine his breakeven point in both sales and dollars. He explained that break even is the point where all costs are covered by sales and so, profit is equal to zero. He also suggested that the company should establish monthly target profitability in order to determine the amount of cakes it would need to sell to achieve this level. Since Rich didn't know how to perform this calculation and in order to save money, he asked you to calculate the company's breakeven point and the target sales needed to achieve a monthly profit of $500. Required: Calculate S & S Bakery's breakeven point in both units and sales dollars. Also, calculate the sales needed in order to achieve a monthly profit of $500. (Note: Use four decimal places in converting from total to per unit cost). TABLE #1: COST INFORMATION STANDARD PER CAKE n/a 1 pound 4 eggs 1 lb. 1 lb. *2 lb. ITEM AND INGREDIENTS COST Conventional Oven $6,000 (depreciated over 5 years on a SL basis - No salvage) Refrigerator $0 (provided by landlord) Baking pans, licenses $0 (paid by dad) Baking flour $24 per 8 lb. bag Eggs $2 dozen Sugar $15 per 25 lb. bag Baking soda $6 per 14 lb. box Butter $6.50 per 4 lb. Raisins $8 per 2 lbs. Others (cinnamon, yeast, $30 for all 3 boxes per walnuts) month Cash register $12 per month (rental for 2 years) Utilities includes gas, $50 month electric, and water) Mobile phone (business) $50 month Salary Rich $500 month Wages Michelle/Jen $8 hr. Salary Fern $100 month Accountant $100 month Estimated MOH $4 per cake 1 person - 1.5 hours Assignment H4 Statement of Cost of Goods Manufactured For the month ended 1/31/2017 Direct Materials Raw Materials Add: Purchases of Raw materials Raw Materials Available for use Deduct Ending raw Materials Raw Materials used in production Direct Labor Manufacturing Overhead Total Manufacturing Cost Add: Beginning WIP Deduct: Ending WIP Cost of goods Manufactured Income Statement For the month ended 1/31/2017 Sales COGS Gross Margin Expenses: Cash register Salary Expense Phone Expense Acct expense Total Expenses Net Income Assignment #5 Break Even Analysis/Target Sales January 2017 1 unit Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income Contribution Margin/Sales Ratio: Break Even in Unit Sales: Fixed expenses/CM unit Actual: Cakes: Break even in dollars: Fixed expenses/CM ratio Sales Price x Break Even per unit Actual: Per Cake: Target Sales in Units: Fixed expenses+profit/CM per unit Target Sales in Dollars: Fixed expenses + Profit/CM ratio Sales price x Target sales per unit Actual Per cake Table 2 Assignment #1 COST CLASSIFICATION CHART Variabl Direc Indire Produ DM DL MO e t ct ct H Description Fixe d Perio d Oven Refrigerator Baking Pans Flour Eggs Sugar Baking Soda Butter Raisins Other Materials Cash Register Utilities Mobile Phone Rich Michelle/Jennifer Fern Accountant Business License Health Inspections Rent