ECON $122-$ Case Study

From a young age, Julie has always loved to bake. Julie went to culinary school to become a professional

baker and open her own bakery. Although Julie has many skills in the kitchen, she knows nothing about

business, so she decides to take a Managerial Accounting course before opening her bakery. While taking the class, she takes the concepts from each Chapter and relates the material to her bakery to make sure she is fully prepared to get it up and running. Put yourself in Julie$$s shoes to prepare to open your bakery

by the end of the semester!

Follow the prompts below, that align with the content of each chapter, and use Excel to prepare yourself

to get your bakery up and running:

$1)$ Below is a list of business$-$related expenses Julie is expec$$ng to have in her first year of business:

$$ Bakery Rent

$$ Julie$$s $($Supervisor$)$ Salary

$$ Baker$$s Wages

$$ Hourly Bakery Cashier

$$ Tax Accountant

$$ Ingredients $($Sugar$,$ Buter, Eggs, Milk, Baking Powder, Flour$)$

$$ Bakery U$$li$$es

$$ Bakery Insurance

$$ Bakery Oven Deprecia$$on

$$ Business Cards

$$ Cake Boxes

$$ Bakery Refrigerator Deprecia$$on

$$ Latex Gloves for Bakers

$$ Microso$$ Office Suite Subscrip$$on $($Excel$)$

Please categorize each cost as Direct vs$.$ Indirect, Product $($DM$/$DL$/$MOH$)$ vs$.$ Period, and Prime

vs$.$ Conversion using the dropdowns in Excel.

$2)$ Julie does not have enough money to hire a Managerial Accountant, so she must track her

business expenses herself. First think about what type of cos$$ng system would be more

beneficial for Julie. She chooses to use Excel to track all her business transac$$ons$.$ To test this

out, she has prepared an es$$mate of her purchases for the first month of business below. This

will help her have a beter understanding of how to track the flow of her inventory.

a$.$ Purchase $$10,000$ in ingredients $($Sugar$,$ Buter, Eggs, Milk, Baking Powder, Flour$)$ and

$$5,000$ in other supplies$/$materials $($Cake Boxes, Latex Gloves for Bakers$)$ to get started.

b$.$ Each wedding cake that will require $$125$ in ingredients, $$10$ for a cake box, and $$15$ in

other supplies$/$materials$.$ Julie plans on producing $60$ weddings cakes in the first month.

c$.$ The wedding cake will take $6$ hours to make, and Julie es$$mates she will pay bakers

$$20/$hr$.$ Julie$$s salary will be $$5000$ for the first month.

d$.$ Julie expects the first month$$s u$$li$$es to be $$500,$ rent to be $$2000,$ insurance to be

$$100,$ and bakery equipment deprecia$$on to be $$1000.$

e$.$ Julie would like to use a bakery$-$wide rate for manufacturing overhead alloca$$on using

direct labor hours. She es$$mates that total Manufacturing Overhead will be $$100,000$

and direct labor hours will be $5000$ hours for the year.

f$.$ Calculate the total manufacturing cost of the wedding cake by adding together the direct

materials, direct labor, and allocated manufacturing overhead for the job.

g$.$ Julie plans to sell $50$ wedding cakes for $$800$ each.

h$.$ Calculate the cost per cake to find the Cost of Goods Sold for $50$ Cakes.

$3)$ Julie might want to use ac$$vity$-$based cos$$ng instead of a bakery$-$wide rate for alloca$$ng

overhead. If Julie uses the following ac$$vi$$es and es$$mated costs, how much should she

allocate to the $60$ wedding cakes that required $360$ direct labor hours, $120$ machine hours, and

$60$ cake boxes.

Ac$$vity Alloca$$on Base Overhead Cost

Mixing Direct Labor Hours $(5000$ hrs$)$ $$70,000$

Oven Machine Hours $(2000$ hrs$)$ $$18,000$

Packaging Cake Boxes $(300$ boxes$)$ $$12,000$

Use Excel to calculate the alloca$$on rate for each ac$$vity to find the amount of overhead that

should be allocated to the wedding cake.

Look at how the allocated overhead under the ac$$vity$-$based cos$$ng differs from the bakerywide method used in #$2$ and think how this might affect our business.

$4)$ Julie wants to know if she will be able to sell enough wedding cakes each month to be able to

pay the bills. Use the expenses listed in #$1$ and the selling price of cakes in #$2$ to categorize the

business costs as Variable or Fixed in Excel.

A$$er categorizing the expenses, calculate the es$$mated number of wedding cakes that Julie will

need to sell to breakeven, assuming she will produce $60$ cakes in the first month.

If Julie wants to make a profit of $$10,000,$ how many wedding cakes would she need to sell?

If Julie thinks she is likely to sell $50$ cakes, what will her opera$$ng income be$?$

$5)$ Julie is in a perfect compe$$on market, where she is a price$-$taker, which is why she is stuck

selling her cakes for $$800$ each. Using the data from #$4,$ assuming she is selling $50$ cakes per

month, she wants to know how much her total product costs should be if she wants to make a

profit of $20\%$ of the selling price. Are her current product costs allowing her to meet the desired

profit that she has set for herself?