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This is adapted from a 2014 AICPA Accounting Competition in Management Accounting Stage One A history of Humble Pies Humble Pies, Inc. is the genius of childhood nigbors and best friends und lackson and Taylor Johan Though almost inseparable through high school, the two parted ways after graduation-Unda heading abroad to study the art of pasty making in some of the most elite patisseries in Paris, and Taylor pursuing his low of food especially bacon by landing jobs in some of the finest restaurants in the hometown of Charlotte, NC A chance encounter back in 2005 reunited the two and got them talking of the mutual love of food and what they'd been laming Soon they were spending their free time crafting Quirky but sophisticated not to mention delicious) pies-passing them out to friends and family, and building a grassroots fan base around town. When the operation outgrew the lackson family kitchen, unda and Taylor applied for a small business loan. With it, they bought a smalle factory in Charlotte and became the proud owners of a 60,000 square foot facility where they now produce high-quality pies A couple years ago, as demand for the ples grew to a national market thanks to the company's instagram account the co-ownershired a new Controller, a OPA with her Chartered Global Management Accountant (CGMA) designation from their OPA Firm to help them continue to grow and stay profitable. Now they just landed the largest grocery store wat in 2017, the company had $6.1 million in sales revenue and is on track to do $9.3 million this year Humble Pieses natural and organic ingredients, and combines Linda's Parisian techniques with Taylor's unexpected takes on dassical southern deserts ke Bacon Chocolate Chess, Avocado Key Lime and Chai Apple Pie It offers two main product lines: 10-inch whole ples are presliced,boxed and sold to distributors for food service applications or grocery store bakery cases. 10-inch variety pies are packed in strong, clear plastic domes to be sold in refrigerated cases and with custom labels. The variety packs contain two pieces of each kind of pie Linda and Taylor love putting feedback from their ons and are always testing new recipes based on estions or grocer suppliers' needs. They often receive s from food chains for rent types and ces of ges, and must decide which ones to accept and which ones to pass on Me production Naturally, Linda and Taylor can't reveal the recipes, but they have provided some details on how the pies are made. Most pes go through a generalfour-step processi n g bing and package Humble Pies makes five different customized in large batches and Slings are produced in erbatches depending on the production schedule Netcuts are placed in insandited with well, then and baked for 45 0 0 at a time. After they've cooled for an hour, are decoratie paded and labeled and placed on par elhoed i s about to come apie product order and the planta t ie production methods. The goal to produce a pie every second Since contaminated food would lead to a visit by the Health Department (and possibly shutting down the factory), there are at least three sanitation workers on duty at all times. Generally, there are 3-4 warehouse workers on duty to handle the shipping, receiving and storage of raw materials and finished product. The plant typically runs two shifts per day with two production supervisors assigned to each shift. For each of the two product lines, the process is virtually the same regardless of the flavors or ingredients for the production line (mixing, filling, baking.) However, the processes between the product lines is very different in the packaging because the variety packs take much longer than for whole pies because workers need to pull different flavor slices and place them in the same tin. Not to mention the packaging is different. The whole pies go in boxes while the variety pies go in lidded plastic containers. Both lines have similar labeling requirements. Humble Pies seldom places its own labels and logo on any of their products. Label designs generally come from the customer, so they vary based on each order. The plant currently has capacity to do $1 million in sales per month, but with additional investments in ovens, mixers and workstations (for about $500,000) it could increase to $1.5 million. October through December tends to be a higher volume period (with increased demand for holidays like Thanksgiving and New Year's), resulting in Humble Pies getting roughly 60% of its business during that time period. Because of the rush, the plant runs overtime and weekend shifts as needed to get the product to its suppliers. The owners believe the labeling process significantly slows down production time. Reports Humble Pies' managers rely heavily on a "Labor Report to manage its work force. The report lists four salaried workers and approximately 50 hourly employees, expected number of work days for the month, hours per day (typically 8) and total projected hours for the month. The hours are multiplied by the employee pay rate (from $10.50-$15.50 per hour) to get expected monthly gross pay amount for each hourly employee based on a 40-hour workweek. Production workers are paid as following: Mixing workers earn $11.50/hr, Filling and baking workers earn $10.50/hr, Packaging workers eam $15.50/hr. The sum of all expected hourly employee gross monthly pay amounts are added to the salaried production workers gross monthly pay and the projected total payroll added costs (Employer taxes, Social Security, etc.) to get "total labor dollars cost for the month. The total labor dollars are divided by projected sales revenues to get a "projected labor percentage." Management watches this number pretty closely and tries to keep it around 20% of sales. In the past, it was assumed that labor costs for the company did not change with sales volume, and some months were profitable and some were not. Currently, Humble Pies' managers adjust labor hours up or down depending on the demand for pies and try to keep the projected labor near 20% of sales. Costing Issues Linda and Taylor are skilled at determining the cost of ingredients, but when it comes to labor and the overhead of each product line, they're not sure where to start. At the moment, Humble Pies allocates the same amount of overhead costs to every output unit. While total labor averages 20%, they believe that labor and overhead costs vary greatly by product line. And, since the company does not currently track labor hours by product line, Linda and Taylor have no idea of labor cost or profitability by product line. A digital biometric time clock keeps track of hours for the employees, but management is open to asking shift workers to track their hours by job or batch. Taylor and Linda's primary concern is making sure there is a good reason to change the method and that there's a simple and low-cost way to track it. The company has a small but growing administrative staff that can do some basic record keeping while the Controller manages financial reporting, taxes and decision analysis, a skill she developed while working toward her CGMA designation. The Controller has asked for help determining a product costing system Humble Pies can use for pricing decisions, product line profitability analysis, financial planning and helping managers understand the business. But costs are only one component. The company currently bases pricing decisions on the "three C's": cast, consumer and competition. As a bare minimum, the company wants to achieve a target 17% gross profit margin (or higher) on cost, but Linda and Taylor consider what a consumer is willing to pay the most important factor in pricing. They want to be sure to keep Humble Pies competitive with other companies, Table 1 provides selected actual cost and revenue data for May 2018. Additional information about costs can be found in the Notes to Selected Financial Data below. Table 1: Selected Financial Data (actual cost and revenue data for May 2018) Cost Category Behavior May 2018 Sales $766,667 Expenses: Raw Materials. Bakery Variable $327,934 Labor Administration Mixed $158,767 Salaries Fixed $41,367 Supplies Variable $3.833 Freight & Shipping-In Variable $4.907 Freight & Shipping-Out Variable $64,707 Utilities - Electricity Variable $9 813 Utilities - Gas (ovens) Variable $3.067 Water Variable $920 Repairs & Maintenance Fixed $4,293 Telephone & Internet Fibed $2,300 Co-owners' salary Fixed $25,300 Depreciation Expense: Plant Building 9,460 Pastry Machines 6,920 Mixers 7,832 Filling Equip. 7,471 Ovens 8,941 Warehouse Freezers 9,210 Total Depr. Fixed $49824 Total Expenses S697.042 Operating Profit Income Tax $22.280 Net operating income $47,345 Unit volume (30,980 whole, 33,520 variety) 64.500 Average Operating Assets $5,500,000 Minimum Rate of Return 8.00% 69 625 51,613 Raw materials Cuatingredients (11) 7.1.20 Filling ingredi 4 65) 300,165 Packaging Time (5.0) Labels 18.076) Bee (S.11) Play container (22) 7,061 2 Labe: Production Superviso Salaries Production was Packaging labes (15.50/hr) wholepis variety pack Sanitation wages (15.50/hr) Shipping & receiving wages ($15.50/hr) 7.016 31,359 18.90 14910 Notes to Selected Financial Data Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher cost items such as flour, sugar, eggs, nuts and fruit that appear on the package label. Flavor additives are relatively low-dollar cost items and a small part of the weight of the pie such as spices, dyes, salt, and certain oils that don't always appear on the package label. Besides the crust and filling ingredients, raw materials include the tins, packaging and labels. Bakery labor: The cost amount consists of 22% supervisory salaries and taxes and the rest hourly workers. Bakery labor workers are organized into four categories: production line (mixing, filling and baking), packaging, sanitation and warehouse (all included as part of cost of goods sold). Administration Salaries: Includes taxes and benefits for the Vice President of Operations, the Controller, Human Resources Manager and two administrative support people. Supplies: Includes supplies relating to production, decorating, sanitation and warehouse (think: adhesive, pastry bags, spatulas, scrapers, icing pens, gloves and so on). Freight & Shipping-In: The costs of shipping raw ingredients and other materials to the factory from suppliers. Freight & Shipping-Out: The costs of shipping finished products to customer locations and distribution centers. Utilities Electricity: Approximately 10% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume. Utilities Gas (ovens): Approximately 5% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume. Water: All for the factory and varies proportionately with production volume. Repairs & Maintenance: All for the factory. Rent expense: The factory uses about 85% of the total square footage of the building and the remainder is for the administrative office. Telephone & Internet: All for the administrative office. Co-owners' salary: Linda Jackson and Taylor Johnson. Brokers' commissions: Generally 4% of sales. Income Tax: Average total tax rate is 32% Layout of Production facility: TO DILDO DEL PAU TICOLO DIODOTTOPP PLETIO J16 - B C D E F G H I K L M N O P Q | A 1 Job 2 Amounts ordered: 3 Whole pies 4 Variety pack 50 60 Whole Unit cost Total $ Variety Unit cost Total $ Units Units 7 8 Direct Material ! Direct Labor Hours Costihr Total $ Hours Costihr Total $ 11 12 15 Manufuring Overhead' Cost driver Cost'unit Total $ Cost drive Costiunit Total $ 16 21 Total cost for job per product 23 Cost per unit 25 Selling price per unit description 28 'Overhead Calculation -- desccription of method: 29 Total overhead cost overhead co cost drive cost driver rate 30 Sheet1 Select destination and press ENTER or choose Paste This is adapted from a 2014 AICPA Accounting Competition in Management Accounting All characters and company information and names in this case document are fictitious. Any resemblance to real person Iving or dead, or companies is purely coincidental Stare One A history of Humble Pies Humble Pies, Inc. is the genius of childhood neighbors and best friends Linda Jackson and Taylor Johnson Though almost inseparable through high school, the two parted ways after graduation-Linda heading abroad to study the art of pasty making in some of the most elite patisseries in Paris, and Taylor pursuing his love of food (especially bacon) by landing jobs in some of the finest restaurants in their hometown of Charlotte, NC A chance encounter back in 2005 reunited the two and got them talking of their mutual love of food and what they'd been learning. Soon they were spending their free time crafting quirky but sophisticated (not to mention delicious) pies-passing them out to friends and family, and building a grassroots fan base around town. When the operation outgrew the Jackson family kitchen, Linda and Taylor applied for a small business loan. With it, they bought a small pie factory in Charlotte and became the proud owners of a 60,000 square-foot facility where they now produce high-quality pies A couple years ago, as demand for the pies grew to a national market (thanks to the company's Instagram account), the co-owners hired a new Controller, a CPA with her Chartered Global Management Accountant (CGMA) designation from their CPA firm to help them continue to grow and stay profitable. Now they just landed their largest grocery store yet. In 2017, the company had $6.1 million in sales revenue and is on track to do $9.3 million this year. Humble Ples uses natural and organic ingredients, and combines Linda's Parisian techniques with Taylor's unexpected takes on classical southern desserts like Bacon Chocolate Chess, Avocado Key Lime and Chai Apple Pie It offers two main product lines: 10-inch whole pies are pre-sliced,boxed and sold to distributors for food service applications or grocery in-store bakery cases. 10-inch variety pies are packed in strong, clear plastic domes to be sold in refrigerated cases and with custom labels. The variety packs contain two pieces of each kind of ple. Linda and Taylor love getting feedback from their fans and are always testing new recipes based on suggestions or grocer suppliers' needs. They often receive requests from food chains for different types and sizes of ples, and must decide which ones to accept and which ones to pass on Ple production Naturally, Linda and Taylor can't reveal their recipes, but they have provided some details on how the pies are made. Most ples go through a general four-step process: mising filing, baking and packaging. Humble Pies makes five different crusts mixed in large batches, and filings are produced in smaller batches depending on the production schedule. Next, crusts are placed in tins and filled with, well, the filling and baked for 45 minutes (20 at a time). After they've cooled for an hour, pies are decorated, sliced, packaged and labeled and placed on pallets to freeze until shipped. It takes about a week to complete a ple product order and the plant uses just-in-time production methods. The goal is to produce a ple every five seconds. 3 of 6 d food would lead to a visit by the Health Department (and possibly shutting down the factoryl, there are at least three sanitation workers on duty at all times. Generally, there are 3-4 warehouse workers on duty to handle the shipping, receiving and storage of raw materials and finished product. The plant typically runs two shifts per day with two production supervisors assigned to each shift For each of the two product lines, the process is virtually the same regardless of the flavors or ingredients for the production line (mixing, filling, baking.) However, the processes between the product lines is very different in the packaging because the variety packs take much longer than for whole pies because workers need to pull different flavor slices and place them in the same tin. Not to mention the packaging is different. The whole pies go in boxes while the variety pies go in lidded plastic containers. Both lines have similar labeling requirements. Humble Pies seldom places its own labels and logo on any of their products Label designs generally come from the customer, so they vary based on each order. The plant currently has capacity to do $1 million in sales per month, but with additional investments in ovens, mixers and workstations (for about $500,000) it could increase to $1.5 million October through December tends to be a higher volume period with increased demand for holidays like Thanksgiving and New Year's), resulting in Humble Pies getting roughly 60% of its business during that time period. Because of the rush, the plant runs overtime and weekend shifts as needed to get the product to its suppliers. The owners believe the labeling process significantly slows down production time. Reports Humble Pies' managers rely heavily on a "Labor Report to manage its work force. The report lists four salaried workers and approximately 50 hourly employees, expected number of work days for the month, hours per day (typically 8) and total projected hours for the month. The hours are multiplied by the employee pay rate (from $10.50-$15.50 per hour) to get expected monthly gross pay amount for each hourly employee based on a 40-hour workweek. Production workers are paid as following: Mixing workers earn $11.50/hr, Filling and baking workers earn $10.50/hr, Packaging workers earn $15.50/hr. The sum of all expected hourly employee gross monthly pay amounts are added to the salaried production workers gross monthly pay and the projected total payroll added costs (Employer taxes, Social Security etc.) to get "total labor dollars" cost for the month. The total labor dollars are divided by projected sales revenues to get a "projected labor percentage." Management watches this number pretty closely and tries to keep it around 20% of sales. In the past, it was assumed that labor costs for the company did not change with sales volume, and some months were profitable and some were not. Currently, Humble Pies managers adjust labor hours up or down depending on the demand for pies and try to keep the projected labor near 20% of sales. Costing Issues Linda and Taylor are skilled at determining the cost of ingredients, but when it comes to labor and the overhead of each product line, they're not sure where to start. At the moment, Humble Pies allocates the same amount of overhead costs to every output unit. While total labor averages 20%, they believe that labor and overhead costs vary greatly by product line. And, since the company does not currently track labor hours by product line, Linda and Taylor have no idea of labor cost or profitability by product line. A digital biometric time dock keeps track of hours for the employees, but management is open to asking shift workers to track their hours by job or batch. Taylor and Linda's primary concern is making sure there is a good reason to change the method and that there's a simple and low-cost way to track it. Page 2 The company has a small but growing administrative staff that can do some basic record keeping while the Controller manages financial reporting, taxes and decision analysis, a skill she developed while working toward her CGMA designation. The Controller has asked for help determining a product costing system Humble Pies can use for pricing decisions, product line profitability analysis, financial planning and helping managers understand the business. But costs are only one component. The company currently bases pricing decisions on the three C's: cost,consumer and competition. As a bare minimum, the company wants to achieve a target 17% gross profit margin for higher)on cost, but Linda and Taylor consider what a consumer is willing to pay the most important factor in pricing. They want to be sure to keep Humble Pies competitive with other companies. Table 1 provides selected actual cost and revenue data for May 2018 Additional information about costs can be found in the Notes to Selected Financial Data below. Table 1: Selected Financial Data (actual cost and revenue data for May 2018) Cost Category Behavior May 2018 Sales S766.667 Expenses Raw Materials. Bakery Variable 5327 934 labor Administration Mixed $158.767 Salaries Fred $41.367 Supplies Variable 53.833 Freight & Shipping-in Variable 54.907 Freight & Shipping-Out Variable $64.707 Utilities - Electricity Variable 59.813 Utilities - Gas fovens) Variable $3.067 Water Variable $920 Repairs & Maintenance Fixed $4,293 Telephone & Internet Fixed $2,300 Co-owners' salary Fixed $25,300 Depreciation Expense: Plant Building 9.450 Pastry Machines 6.920 Mixers 7.832 Filling Equip 7471 Ovens 8,941 Warehouse Freezers 9.210 Total Depr Fixed $49.834 Total Expenses $697 002 Operating Profit $69.625 Income Tax $22.280 Net operating income S42345 Unit volume (30,980 whole, 33,520 variety 54500 Average Operating Assets $5.500.000 Minimum Rate of Return 300 Label 1) Page 3 Notes to Selected Financial Data Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher cost items such as flour, sugar, eggs, nuts and fruit that appear on the package label. Flavor additives are relatively low-dollar cost items and a small part of the weight of the pie such as spices, dyes, salt, and certain oils that don't always appear on the package label. Besides the crust and filling ingredients, raw materials include the tins, packaging and labels Bakery labor: The cost amount consists of 22% supervisory salaries and taxes and the rest hourly workers. Bakery labor workers are organized into four categories: production line (mixing, filling and baking), packaging, sanitation and warehouse (all included as part of cost of goods sold). Administration Salaries: Includes taxes and benefits for the Vice President of Operations, the Controller, Human Resources Manager and two administrative support people. Supplies: Includes supplies relating to production, decorating, sanitation and warehouse (think: adhesive, pastry bags, spatulas, scrapers, icing pens, gloves and so on). Freight & Shipping-In: The costs of shipping raw ingredients and other materials to the factory from suppliers. Freight & Shipping-Out: The costs of shipping finished products to customer locations and distribution centers. Utilities Electricity: Approximately 10% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume. Utilities Gas (ovens): Approximately 5% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume. Water: All for the factory and varies proportionately with production volume. Repairs & Maintenance: All for the factory. Rent expense: The factory uses about 85% of the total square footage of the building and the remainder is for the administrative office. Telephone & Internet: All for the administrative office. Co-owners' salary: Linda Jackson and Taylor Johnson. Brokers' commissions: Generally 4% of sales. Income Tax: Average total tax rate is 32%. Layout of Production facility: This is adapted from a 2014 AICPA Accounting Competition in Management Accounting Stage One A history of Humble Pies Humble Pies, Inc. is the genius of childhood nigbors and best friends und lackson and Taylor Johan Though almost inseparable through high school, the two parted ways after graduation-Unda heading abroad to study the art of pasty making in some of the most elite patisseries in Paris, and Taylor pursuing his low of food especially bacon by landing jobs in some of the finest restaurants in the hometown of Charlotte, NC A chance encounter back in 2005 reunited the two and got them talking of the mutual love of food and what they'd been laming Soon they were spending their free time crafting Quirky but sophisticated not to mention delicious) pies-passing them out to friends and family, and building a grassroots fan base around town. When the operation outgrew the lackson family kitchen, unda and Taylor applied for a small business loan. With it, they bought a smalle factory in Charlotte and became the proud owners of a 60,000 square foot facility where they now produce high-quality pies A couple years ago, as demand for the ples grew to a national market thanks to the company's instagram account the co-ownershired a new Controller, a OPA with her Chartered Global Management Accountant (CGMA) designation from their OPA Firm to help them continue to grow and stay profitable. Now they just landed the largest grocery store wat in 2017, the company had $6.1 million in sales revenue and is on track to do $9.3 million this year Humble Pieses natural and organic ingredients, and combines Linda's Parisian techniques with Taylor's unexpected takes on dassical southern deserts ke Bacon Chocolate Chess, Avocado Key Lime and Chai Apple Pie It offers two main product lines: 10-inch whole ples are presliced,boxed and sold to distributors for food service applications or grocery store bakery cases. 10-inch variety pies are packed in strong, clear plastic domes to be sold in refrigerated cases and with custom labels. The variety packs contain two pieces of each kind of pie Linda and Taylor love putting feedback from their ons and are always testing new recipes based on estions or grocer suppliers' needs. They often receive s from food chains for rent types and ces of ges, and must decide which ones to accept and which ones to pass on Me production Naturally, Linda and Taylor can't reveal the recipes, but they have provided some details on how the pies are made. Most pes go through a generalfour-step processi n g bing and package Humble Pies makes five different customized in large batches and Slings are produced in erbatches depending on the production schedule Netcuts are placed in insandited with well, then and baked for 45 0 0 at a time. After they've cooled for an hour, are decoratie paded and labeled and placed on par elhoed i s about to come apie product order and the planta t ie production methods. The goal to produce a pie every second Since contaminated food would lead to a visit by the Health Department (and possibly shutting down the factory), there are at least three sanitation workers on duty at all times. Generally, there are 3-4 warehouse workers on duty to handle the shipping, receiving and storage of raw materials and finished product. The plant typically runs two shifts per day with two production supervisors assigned to each shift. For each of the two product lines, the process is virtually the same regardless of the flavors or ingredients for the production line (mixing, filling, baking.) However, the processes between the product lines is very different in the packaging because the variety packs take much longer than for whole pies because workers need to pull different flavor slices and place them in the same tin. Not to mention the packaging is different. The whole pies go in boxes while the variety pies go in lidded plastic containers. Both lines have similar labeling requirements. Humble Pies seldom places its own labels and logo on any of their products. Label designs generally come from the customer, so they vary based on each order. The plant currently has capacity to do $1 million in sales per month, but with additional investments in ovens, mixers and workstations (for about $500,000) it could increase to $1.5 million. October through December tends to be a higher volume period (with increased demand for holidays like Thanksgiving and New Year's), resulting in Humble Pies getting roughly 60% of its business during that time period. Because of the rush, the plant runs overtime and weekend shifts as needed to get the product to its suppliers. The owners believe the labeling process significantly slows down production time. Reports Humble Pies' managers rely heavily on a "Labor Report to manage its work force. The report lists four salaried workers and approximately 50 hourly employees, expected number of work days for the month, hours per day (typically 8) and total projected hours for the month. The hours are multiplied by the employee pay rate (from $10.50-$15.50 per hour) to get expected monthly gross pay amount for each hourly employee based on a 40-hour workweek. Production workers are paid as following: Mixing workers earn $11.50/hr, Filling and baking workers earn $10.50/hr, Packaging workers eam $15.50/hr. The sum of all expected hourly employee gross monthly pay amounts are added to the salaried production workers gross monthly pay and the projected total payroll added costs (Employer taxes, Social Security, etc.) to get "total labor dollars cost for the month. The total labor dollars are divided by projected sales revenues to get a "projected labor percentage." Management watches this number pretty closely and tries to keep it around 20% of sales. In the past, it was assumed that labor costs for the company did not change with sales volume, and some months were profitable and some were not. Currently, Humble Pies' managers adjust labor hours up or down depending on the demand for pies and try to keep the projected labor near 20% of sales. Costing Issues Linda and Taylor are skilled at determining the cost of ingredients, but when it comes to labor and the overhead of each product line, they're not sure where to start. At the moment, Humble Pies allocates the same amount of overhead costs to every output unit. While total labor averages 20%, they believe that labor and overhead costs vary greatly by product line. And, since the company does not currently track labor hours by product line, Linda and Taylor have no idea of labor cost or profitability by product line. A digital biometric time clock keeps track of hours for the employees, but management is open to asking shift workers to track their hours by job or batch. Taylor and Linda's primary concern is making sure there is a good reason to change the method and that there's a simple and low-cost way to track it. The company has a small but growing administrative staff that can do some basic record keeping while the Controller manages financial reporting, taxes and decision analysis, a skill she developed while working toward her CGMA designation. The Controller has asked for help determining a product costing system Humble Pies can use for pricing decisions, product line profitability analysis, financial planning and helping managers understand the business. But costs are only one component. The company currently bases pricing decisions on the "three C's": cast, consumer and competition. As a bare minimum, the company wants to achieve a target 17% gross profit margin (or higher) on cost, but Linda and Taylor consider what a consumer is willing to pay the most important factor in pricing. They want to be sure to keep Humble Pies competitive with other companies, Table 1 provides selected actual cost and revenue data for May 2018. Additional information about costs can be found in the Notes to Selected Financial Data below. Table 1: Selected Financial Data (actual cost and revenue data for May 2018) Cost Category Behavior May 2018 Sales $766,667 Expenses: Raw Materials. Bakery Variable $327,934 Labor Administration Mixed $158,767 Salaries Fixed $41,367 Supplies Variable $3.833 Freight & Shipping-In Variable $4.907 Freight & Shipping-Out Variable $64,707 Utilities - Electricity Variable $9 813 Utilities - Gas (ovens) Variable $3.067 Water Variable $920 Repairs & Maintenance Fixed $4,293 Telephone & Internet Fibed $2,300 Co-owners' salary Fixed $25,300 Depreciation Expense: Plant Building 9,460 Pastry Machines 6,920 Mixers 7,832 Filling Equip. 7,471 Ovens 8,941 Warehouse Freezers 9,210 Total Depr. Fixed $49824 Total Expenses S697.042 Operating Profit Income Tax $22.280 Net operating income $47,345 Unit volume (30,980 whole, 33,520 variety) 64.500 Average Operating Assets $5,500,000 Minimum Rate of Return 8.00% 69 625 51,613 Raw materials Cuatingredients (11) 7.1.20 Filling ingredi 4 65) 300,165 Packaging Time (5.0) Labels 18.076) Bee (S.11) Play container (22) 7,061 2 Labe: Production Superviso Salaries Production was Packaging labes (15.50/hr) wholepis variety pack Sanitation wages (15.50/hr) Shipping & receiving wages ($15.50/hr) 7.016 31,359 18.90 14910 Notes to Selected Financial Data Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher cost items such as flour, sugar, eggs, nuts and fruit that appear on the package label. Flavor additives are relatively low-dollar cost items and a small part of the weight of the pie such as spices, dyes, salt, and certain oils that don't always appear on the package label. Besides the crust and filling ingredients, raw materials include the tins, packaging and labels. Bakery labor: The cost amount consists of 22% supervisory salaries and taxes and the rest hourly workers. Bakery labor workers are organized into four categories: production line (mixing, filling and baking), packaging, sanitation and warehouse (all included as part of cost of goods sold). Administration Salaries: Includes taxes and benefits for the Vice President of Operations, the Controller, Human Resources Manager and two administrative support people. Supplies: Includes supplies relating to production, decorating, sanitation and warehouse (think: adhesive, pastry bags, spatulas, scrapers, icing pens, gloves and so on). Freight & Shipping-In: The costs of shipping raw ingredients and other materials to the factory from suppliers. Freight & Shipping-Out: The costs of shipping finished products to customer locations and distribution centers. Utilities Electricity: Approximately 10% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume. Utilities Gas (ovens): Approximately 5% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume. Water: All for the factory and varies proportionately with production volume. Repairs & Maintenance: All for the factory. Rent expense: The factory uses about 85% of the total square footage of the building and the remainder is for the administrative office. Telephone & Internet: All for the administrative office. Co-owners' salary: Linda Jackson and Taylor Johnson. Brokers' commissions: Generally 4% of sales. Income Tax: Average total tax rate is 32% Layout of Production facility: TO DILDO DEL PAU TICOLO DIODOTTOPP PLETIO J16 - B C D E F G H I K L M N O P Q | A 1 Job 2 Amounts ordered: 3 Whole pies 4 Variety pack 50 60 Whole Unit cost Total $ Variety Unit cost Total $ Units Units 7 8 Direct Material ! Direct Labor Hours Costihr Total $ Hours Costihr Total $ 11 12 15 Manufuring Overhead' Cost driver Cost'unit Total $ Cost drive Costiunit Total $ 16 21 Total cost for job per product 23 Cost per unit 25 Selling price per unit description 28 'Overhead Calculation -- desccription of method: 29 Total overhead cost overhead co cost drive cost driver rate 30 Sheet1 Select destination and press ENTER or choose Paste This is adapted from a 2014 AICPA Accounting Competition in Management Accounting All characters and company information and names in this case document are fictitious. Any resemblance to real person Iving or dead, or companies is purely coincidental Stare One A history of Humble Pies Humble Pies, Inc. is the genius of childhood neighbors and best friends Linda Jackson and Taylor Johnson Though almost inseparable through high school, the two parted ways after graduation-Linda heading abroad to study the art of pasty making in some of the most elite patisseries in Paris, and Taylor pursuing his love of food (especially bacon) by landing jobs in some of the finest restaurants in their hometown of Charlotte, NC A chance encounter back in 2005 reunited the two and got them talking of their mutual love of food and what they'd been learning. Soon they were spending their free time crafting quirky but sophisticated (not to mention delicious) pies-passing them out to friends and family, and building a grassroots fan base around town. When the operation outgrew the Jackson family kitchen, Linda and Taylor applied for a small business loan. With it, they bought a small pie factory in Charlotte and became the proud owners of a 60,000 square-foot facility where they now produce high-quality pies A couple years ago, as demand for the pies grew to a national market (thanks to the company's Instagram account), the co-owners hired a new Controller, a CPA with her Chartered Global Management Accountant (CGMA) designation from their CPA firm to help them continue to grow and stay profitable. Now they just landed their largest grocery store yet. In 2017, the company had $6.1 million in sales revenue and is on track to do $9.3 million this year. Humble Ples uses natural and organic ingredients, and combines Linda's Parisian techniques with Taylor's unexpected takes on classical southern desserts like Bacon Chocolate Chess, Avocado Key Lime and Chai Apple Pie It offers two main product lines: 10-inch whole pies are pre-sliced,boxed and sold to distributors for food service applications or grocery in-store bakery cases. 10-inch variety pies are packed in strong, clear plastic domes to be sold in refrigerated cases and with custom labels. The variety packs contain two pieces of each kind of ple. Linda and Taylor love getting feedback from their fans and are always testing new recipes based on suggestions or grocer suppliers' needs. They often receive requests from food chains for different types and sizes of ples, and must decide which ones to accept and which ones to pass on Ple production Naturally, Linda and Taylor can't reveal their recipes, but they have provided some details on how the pies are made. Most ples go through a general four-step process: mising filing, baking and packaging. Humble Pies makes five different crusts mixed in large batches, and filings are produced in smaller batches depending on the production schedule. Next, crusts are placed in tins and filled with, well, the filling and baked for 45 minutes (20 at a time). After they've cooled for an hour, pies are decorated, sliced, packaged and labeled and placed on pallets to freeze until shipped. It takes about a week to complete a ple product order and the plant uses just-in-time production methods. The goal is to produce a ple every five seconds. 3 of 6 d food would lead to a visit by the Health Department (and possibly shutting down the factoryl, there are at least three sanitation workers on duty at all times. Generally, there are 3-4 warehouse workers on duty to handle the shipping, receiving and storage of raw materials and finished product. The plant typically runs two shifts per day with two production supervisors assigned to each shift For each of the two product lines, the process is virtually the same regardless of the flavors or ingredients for the production line (mixing, filling, baking.) However, the processes between the product lines is very different in the packaging because the variety packs take much longer than for whole pies because workers need to pull different flavor slices and place them in the same tin. Not to mention the packaging is different. The whole pies go in boxes while the variety pies go in lidded plastic containers. Both lines have similar labeling requirements. Humble Pies seldom places its own labels and logo on any of their products Label designs generally come from the customer, so they vary based on each order. The plant currently has capacity to do $1 million in sales per month, but with additional investments in ovens, mixers and workstations (for about $500,000) it could increase to $1.5 million October through December tends to be a higher volume period with increased demand for holidays like Thanksgiving and New Year's), resulting in Humble Pies getting roughly 60% of its business during that time period. Because of the rush, the plant runs overtime and weekend shifts as needed to get the product to its suppliers. The owners believe the labeling process significantly slows down production time. Reports Humble Pies' managers rely heavily on a "Labor Report to manage its work force. The report lists four salaried workers and approximately 50 hourly employees, expected number of work days for the month, hours per day (typically 8) and total projected hours for the month. The hours are multiplied by the employee pay rate (from $10.50-$15.50 per hour) to get expected monthly gross pay amount for each hourly employee based on a 40-hour workweek. Production workers are paid as following: Mixing workers earn $11.50/hr, Filling and baking workers earn $10.50/hr, Packaging workers earn $15.50/hr. The sum of all expected hourly employee gross monthly pay amounts are added to the salaried production workers gross monthly pay and the projected total payroll added costs (Employer taxes, Social Security etc.) to get "total labor dollars" cost for the month. The total labor dollars are divided by projected sales revenues to get a "projected labor percentage." Management watches this number pretty closely and tries to keep it around 20% of sales. In the past, it was assumed that labor costs for the company did not change with sales volume, and some months were profitable and some were not. Currently, Humble Pies managers adjust labor hours up or down depending on the demand for pies and try to keep the projected labor near 20% of sales. Costing Issues Linda and Taylor are skilled at determining the cost of ingredients, but when it comes to labor and the overhead of each product line, they're not sure where to start. At the moment, Humble Pies allocates the same amount of overhead costs to every output unit. While total labor averages 20%, they believe that labor and overhead costs vary greatly by product line. And, since the company does not currently track labor hours by product line, Linda and Taylor have no idea of labor cost or profitability by product line. A digital biometric time dock keeps track of hours for the employees, but management is open to asking shift workers to track their hours by job or batch. Taylor and Linda's primary concern is making sure there is a good reason to change the method and that there's a simple and low-cost way to track it. Page 2 The company has a small but growing administrative staff that can do some basic record keeping while the Controller manages financial reporting, taxes and decision analysis, a skill she developed while working toward her CGMA designation. The Controller has asked for help determining a product costing system Humble Pies can use for pricing decisions, product line profitability analysis, financial planning and helping managers understand the business. But costs are only one component. The company currently bases pricing decisions on the three C's: cost,consumer and competition. As a bare minimum, the company wants to achieve a target 17% gross profit margin for higher)on cost, but Linda and Taylor consider what a consumer is willing to pay the most important factor in pricing. They want to be sure to keep Humble Pies competitive with other companies. Table 1 provides selected actual cost and revenue data for May 2018 Additional information about costs can be found in the Notes to Selected Financial Data below. Table 1: Selected Financial Data (actual cost and revenue data for May 2018) Cost Category Behavior May 2018 Sales S766.667 Expenses Raw Materials. Bakery Variable 5327 934 labor Administration Mixed $158.767 Salaries Fred $41.367 Supplies Variable 53.833 Freight & Shipping-in Variable 54.907 Freight & Shipping-Out Variable $64.707 Utilities - Electricity Variable 59.813 Utilities - Gas fovens) Variable $3.067 Water Variable $920 Repairs & Maintenance Fixed $4,293 Telephone & Internet Fixed $2,300 Co-owners' salary Fixed $25,300 Depreciation Expense: Plant Building 9.450 Pastry Machines 6.920 Mixers 7.832 Filling Equip 7471 Ovens 8,941 Warehouse Freezers 9.210 Total Depr Fixed $49.834 Total Expenses $697 002 Operating Profit $69.625 Income Tax $22.280 Net operating income S42345 Unit volume (30,980 whole, 33,520 variety 54500 Average Operating Assets $5.500.000 Minimum Rate of Return 300 Label 1) Page 3 Notes to Selected Financial Data Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher cost items such as flour, sugar, eggs, nuts and fruit that appear on the package label. Flavor additives are relatively low-dollar cost items and a small part of the weight of the pie such as spices, dyes, salt, and certain oils that don't always appear on the package label. Besides the crust and filling ingredients, raw materials include the tins, packaging and labels Bakery labor: The cost amount consists of 22% supervisory salaries and taxes and the rest hourly workers. Bakery labor workers are organized into four categories: production line (mixing, filling and baking), packaging, sanitation and warehouse (all included as part of cost of goods sold). Administration Salaries: Includes taxes and benefits for the Vice President of Operations, the Controller, Human Resources Manager and two administrative support people. Supplies: Includes supplies relating to production, decorating, sanitation and warehouse (think: adhesive, pastry bags, spatulas, scrapers, icing pens, gloves and so on). Freight & Shipping-In: The costs of shipping raw ingredients and other materials to the factory from suppliers. Freight & Shipping-Out: The costs of shipping finished products to customer locations and distribution centers. Utilities Electricity: Approximately 10% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume. Utilities Gas (ovens): Approximately 5% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume. Water: All for the factory and varies proportionately with production volume. Repairs & Maintenance: All for the factory. Rent expense: The factory uses about 85% of the total square footage of the building and the remainder is for the administrative office. Telephone & Internet: All for the administrative office. Co-owners' salary: Linda Jackson and Taylor Johnson. Brokers' commissions: Generally 4% of sales. Income Tax: Average total tax rate is 32%. Layout of Production facility