J&J Bakery, Inc. Project: A Simplified Management Accounting Project Introduction The objective of this project is to provide students with a practical application of some of the key concepts discussed in the beginning phases of the introductory managerial accounting course, ACCT-122, at Central Ohio Technical College. Learning Outcomes After completing this project, students should be able to: Identify the various costs that are part of a business environment and the three elements of product cost Differentiate between a job-order and a process costing systems Illustrate business transactions using T-account analysis Prepare the statement of cost of goods manufactured and an income statement Calculate the break-even point in units and dollars, and target sales in units and dollars J&J Bakery, Inc. - Business Background As she sat in her Accounting I class bored while listening to the lecture on journal entries, Jamie Jones could not imagine being an accountant in the future. As a young girl, she remembered sitting in the kitchen while her mom and aunts baked those delicious Jamaican black cakes. She remembered that the cakes sold very quickly especially at Christmas time and that people were traveling from as far away as Florida to buy them. Her mom learned to bake from her mother, and she wrote down the cake recipes in case Jamie or one of her siblings decided to follow in her footsteps. However, Jamie chose to follow in her dad's path and so she enrolled in college with plans to become an accountant. Her two older sisters where already studying to be a lawyer and a dentist Jamie had an epiphany as she sat in class, she would leave school at the end of the semester to open up a bakery specializing in Jamaican black cakes. Jamie anticipated that most of her business would be based on special order, customized cakes. She anticipated selling cakes for family weekend gatherings, birthday and wedding celebrations, and holiday gathering. She wanted to have a few cakes available in a store to appeal to the drop in customer. In December 2014 Jamie followed her plans; she dropped out of college, created a business plan, and incorporated as the J&J Bakery Inc. (J&J). The first J is in honor of her mom Jezebel who passed away earlier in the year. Jamie planned to open her business on January 1, 2015. She would use the $50,000 inheritance from her mom as start-up capital and receive a minimal salary of $500 per month for the first year of business. Uncle David, a marketing executive with a national bank, agreed to provide her with marketing support pro-bono. Jamie found the perfect location for her business. A take-out restaurant on the busy intersection of Jamaica and Hillside Avenues in Queens, NY, became available after a bitter divorce between the owners. The landlord was impressed with Jamie's vision and agreed to pay for all renovations and charge her $600 per month for rent. PART 1: Cost Classification (Chapters 2 & 4) - 10 Points Her first action plan was to list all the key products or items that she would need to start the business. Jamie's list included a conventional oven, a cash register, baking pans, business licenses, health inspections, flour, sugar, baking soda, raisins, butter, eggs and rum. She also planned on hiring her accounting professor on a part time basis to perform bookkeeping services and her nieces Brianna and Alexis, to help her in the bakery. Aunt Sue Ellen would supervise the girls so that Jamie could focus on developing the business. J&J's cost components are provided in Table 1. TABLE 1: COST INFORMATION Item and Ingredients Conventional oven Standard per Cake n/a n/a 1 pound 4 eggs 1 pound Refrigerator Baking pans, licenses Baking flour Eggs Sugar Baking soda Butter Raisins Others (currants, diced date, nutmeg, molasses) Cash Register Cost $6,000 (depreciated over 5 years on a SL basis, no salvage value) $0 (provided by landlord) $0 (paid for by dad) $24 per 8 pounds bag $2 per dozen $15 per 25 pounds bag $6 per 14 pounds box $6.50 per 4 pounds $8 per 2 pounds $30 for all 4 boxes per month $12 per month (rental for 2 years $12 per bottle $50 per month 1 pound 12 pound 14 qtr of bottle Rum (alcohol) Utilities (includes gas, electric, and water) Mobile phone (business) Salary - Jamie Salary - nieces Salary aunt Accountant Estimated MOH $50 per month $500 per month $8 per hour $100 per month $100 per month $4.00 per cake 1 person 1.5 hours per cake Required: Jamie needs your help in classifying the various costs. In order to manage these costs, she wants them identified using the information below. She asked that you 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. TABLE 2: COST Classification Chart Fixed Variable Direct Indirect Product DM DL MOH Period Items & Ingredients Oven Cash register Baking pans Business license Health inspections Rent Utilities Mobile Phone Flour Sugar Baking soda Butter Raisons Eggs Rum Others Accountant Brianna Alexis Jamie Aunt Ellen PART 2: Costing Systems (Chapter 4 & Topic Focus 2) - 10 Points Jamie discussed the business plan with her accounting professor who agreed to serve as her part time accountant. His first advice was for the business to develop a budget. Since Jamie did not complete her Accounting Degree, she was not aware of the various costing systems that exist in businesses. Her accounting professor told Jamie of two of the many different types of costing systems that exist in organizations - job order and process costing Required: Which type of costing system is J&J Bakery most likely to use? Explain why this is the case? PART 3: Business Transactions (Chapter 4) - 25 Points Jamie spent the month of December talking to various suppliers in order to determine her cost structure. She has presented cost data information in Table 1. TABLE 1: COST INFORMATION Item and Ingredients Conventional oven Standard per Cake n/a n/a 1 pound 4 eggs 1 pound Refrigerator Baking pans, licenses Baking flour Eggs Sugar Baking soda Butter Raisins Others (currants, diced date, nutmeg, molasses) Cash Register Cost $6,000 (depreciated over 5 years on a SL basis, no salvage value) $0 (provided by landlord) $0 (paid for by dad) $24 per 8 pounds bag $2 per dozen $15 per 25 pounds bag $6 per 14 pounds box $6.50 per 4 pounds $8 per 2 pounds $30 for all 4 boxes per month $12 per month (rental for 2 years $12 per bottle $50 per month 1 pound 1/2 pound 14 qtr of bottle Rum (alcohol) Utilities (includes gas, electric, and water) Mobile phone (business) Salary - Jamie Salary - nieces $50 per month $500 per month $8 per hour 1 person 1.5 hours per cake Salary - aunt Accountant Estimated MOH $100 per month $100 per month $4.00 per cake J&J Bakery Inc. opened for business on January 1, 2015 as planned. During the month of January, the business purchased and used 200 pounds of flour, 200 pounds of sugar, 67 dozen eggs, 20 baking soda boxes, 200 pounds of butter, 100 pounds of raisins, 50 bottles of rum, and the other ingredients (one box of each for a total of four) all from one supplier on account. Manufacturing overhead is applied during production of the cakes at a rate of $4.00 per cake. Jamie purchased the oven using the start-up capital and paid all salaries. Her nieces worked 300 hours in total for the month. January was a very good month for the bakery since it baked 200 cakes and sold all for cash. The average selling price was $50 per cake. All manufacturing overhead is closed out at month end by making the appropriate journal entry to the Cost of Goods Sold Account. The supplier was paid at month end. Required: Document J&J Bakery Inc. January transactions using T-accounts (round all calculations to 2 decimal places). All other costs such as utilities, must be accounted for in the T-accounts - presume such transactions where applicable, are paid in cash. PART 4: Reporting (Chapter 4) - 15 Points Since Jamie was not paying much attention to the discussion on journal entries in her one accounting class, she does not understand the T-accounts that you provided. However, she heard through her accountant that there is a manufacturing report that would provide her with the same information as the T-accounts and is more user- friendly. She believes that the report is called the Statement of Cost of Goods Manufactured Required: Prepare the Statement of Cost of Goods Manufactured for January. Also, prepare an Income Statement for the month of January. (Check out page 142 in your textbook for help!) PART 5: Breakeven Analysis/Target Sales (Chapter 3) - 15 Points Although business was off to a good start in January, Jamie realized that she will need to be profitable in order to continue as a viable business. Jamie discussed the subject of profitability with her accountant who suggested that she first needs to determine her breakeven point in both unit sales and dollars. He explained to her 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 levels in order to determine the amount of cakes it would need to sell to achieve the desired result. Since Jamie did not know how to perform this calculation and in order to save money, she asked you to calculate the company's breakeven point and the target sales need to achieve a monthly profit of $500. Required: Calculate J&J Bakery Inc's breakeven point in both units and sales dollars. Also, calculate the sales needed in order to achieve a monthly profit of $500. Use four decimal places in converting from total to per unit cost. J&J Bakery, Inc. Project: A Simplified Management Accounting Project Introduction The objective of this project is to provide students with a practical application of some of the key concepts discussed in the beginning phases of the introductory managerial accounting course, ACCT-122, at Central Ohio Technical College. Learning Outcomes After completing this project, students should be able to: Identify the various costs that are part of a business environment and the three elements of product cost Differentiate between a job-order and a process costing systems Illustrate business transactions using T-account analysis Prepare the statement of cost of goods manufactured and an income statement Calculate the break-even point in units and dollars, and target sales in units and dollars J&J Bakery, Inc. - Business Background As she sat in her Accounting I class bored while listening to the lecture on journal entries, Jamie Jones could not imagine being an accountant in the future. As a young girl, she remembered sitting in the kitchen while her mom and aunts baked those delicious Jamaican black cakes. She remembered that the cakes sold very quickly especially at Christmas time and that people were traveling from as far away as Florida to buy them. Her mom learned to bake from her mother, and she wrote down the cake recipes in case Jamie or one of her siblings decided to follow in her footsteps. However, Jamie chose to follow in her dad's path and so she enrolled in college with plans to become an accountant. Her two older sisters where already studying to be a lawyer and a dentist Jamie had an epiphany as she sat in class, she would leave school at the end of the semester to open up a bakery specializing in Jamaican black cakes. Jamie anticipated that most of her business would be based on special order, customized cakes. She anticipated selling cakes for family weekend gatherings, birthday and wedding celebrations, and holiday gathering. She wanted to have a few cakes available in a store to appeal to the drop in customer. In December 2014 Jamie followed her plans; she dropped out of college, created a business plan, and incorporated as the J&J Bakery Inc. (J&J). The first J is in honor of her mom Jezebel who passed away earlier in the year. Jamie planned to open her business on January 1, 2015. She would use the $50,000 inheritance from her mom as start-up capital and receive a minimal salary of $500 per month for the first year of business. Uncle David, a marketing executive with a national bank, agreed to provide her with marketing support pro-bono. Jamie found the perfect location for her business. A take-out restaurant on the busy intersection of Jamaica and Hillside Avenues in Queens, NY, became available after a bitter divorce between the owners. The landlord was impressed with Jamie's vision and agreed to pay for all renovations and charge her $600 per month for rent. PART 1: Cost Classification (Chapters 2 & 4) - 10 Points Her first action plan was to list all the key products or items that she would need to start the business. Jamie's list included a conventional oven, a cash register, baking pans, business licenses, health inspections, flour, sugar, baking soda, raisins, butter, eggs and rum. She also planned on hiring her accounting professor on a part time basis to perform bookkeeping services and her nieces Brianna and Alexis, to help her in the bakery. Aunt Sue Ellen would supervise the girls so that Jamie could focus on developing the business. J&J's cost components are provided in Table 1. TABLE 1: COST INFORMATION Item and Ingredients Conventional oven Standard per Cake n/a n/a 1 pound 4 eggs 1 pound Refrigerator Baking pans, licenses Baking flour Eggs Sugar Baking soda Butter Raisins Others (currants, diced date, nutmeg, molasses) Cash Register Cost $6,000 (depreciated over 5 years on a SL basis, no salvage value) $0 (provided by landlord) $0 (paid for by dad) $24 per 8 pounds bag $2 per dozen $15 per 25 pounds bag $6 per 14 pounds box $6.50 per 4 pounds $8 per 2 pounds $30 for all 4 boxes per month $12 per month (rental for 2 years $12 per bottle $50 per month 1 pound 12 pound 14 qtr of bottle Rum (alcohol) Utilities (includes gas, electric, and water) Mobile phone (business) Salary - Jamie Salary - nieces Salary aunt Accountant Estimated MOH $50 per month $500 per month $8 per hour $100 per month $100 per month $4.00 per cake 1 person 1.5 hours per cake Required: Jamie needs your help in classifying the various costs. In order to manage these costs, she wants them identified using the information below. She asked that you 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. TABLE 2: COST Classification Chart Fixed Variable Direct Indirect Product DM DL MOH Period Items & Ingredients Oven Cash register Baking pans Business license Health inspections Rent Utilities Mobile Phone Flour Sugar Baking soda Butter Raisons Eggs Rum Others Accountant Brianna Alexis Jamie Aunt Ellen PART 2: Costing Systems (Chapter 4 & Topic Focus 2) - 10 Points Jamie discussed the business plan with her accounting professor who agreed to serve as her part time accountant. His first advice was for the business to develop a budget. Since Jamie did not complete her Accounting Degree, she was not aware of the various costing systems that exist in businesses. Her accounting professor told Jamie of two of the many different types of costing systems that exist in organizations - job order and process costing Required: Which type of costing system is J&J Bakery most likely to use? Explain why this is the case? PART 3: Business Transactions (Chapter 4) - 25 Points Jamie spent the month of December talking to various suppliers in order to determine her cost structure. She has presented cost data information in Table 1. TABLE 1: COST INFORMATION Item and Ingredients Conventional oven Standard per Cake n/a n/a 1 pound 4 eggs 1 pound Refrigerator Baking pans, licenses Baking flour Eggs Sugar Baking soda Butter Raisins Others (currants, diced date, nutmeg, molasses) Cash Register Cost $6,000 (depreciated over 5 years on a SL basis, no salvage value) $0 (provided by landlord) $0 (paid for by dad) $24 per 8 pounds bag $2 per dozen $15 per 25 pounds bag $6 per 14 pounds box $6.50 per 4 pounds $8 per 2 pounds $30 for all 4 boxes per month $12 per month (rental for 2 years $12 per bottle $50 per month 1 pound 1/2 pound 14 qtr of bottle Rum (alcohol) Utilities (includes gas, electric, and water) Mobile phone (business) Salary - Jamie Salary - nieces $50 per month $500 per month $8 per hour 1 person 1.5 hours per cake Salary - aunt Accountant Estimated MOH $100 per month $100 per month $4.00 per cake J&J Bakery Inc. opened for business on January 1, 2015 as planned. During the month of January, the business purchased and used 200 pounds of flour, 200 pounds of sugar, 67 dozen eggs, 20 baking soda boxes, 200 pounds of butter, 100 pounds of raisins, 50 bottles of rum, and the other ingredients (one box of each for a total of four) all from one supplier on account. Manufacturing overhead is applied during production of the cakes at a rate of $4.00 per cake. Jamie purchased the oven using the start-up capital and paid all salaries. Her nieces worked 300 hours in total for the month. January was a very good month for the bakery since it baked 200 cakes and sold all for cash. The average selling price was $50 per cake. All manufacturing overhead is closed out at month end by making the appropriate journal entry to the Cost of Goods Sold Account. The supplier was paid at month end. Required: Document J&J Bakery Inc. January transactions using T-accounts (round all calculations to 2 decimal places). All other costs such as utilities, must be accounted for in the T-accounts - presume such transactions where applicable, are paid in cash. PART 4: Reporting (Chapter 4) - 15 Points Since Jamie was not paying much attention to the discussion on journal entries in her one accounting class, she does not understand the T-accounts that you provided. However, she heard through her accountant that there is a manufacturing report that would provide her with the same information as the T-accounts and is more user- friendly. She believes that the report is called the Statement of Cost of Goods Manufactured Required: Prepare the Statement of Cost of Goods Manufactured for January. Also, prepare an Income Statement for the month of January. (Check out page 142 in your textbook for help!) PART 5: Breakeven Analysis/Target Sales (Chapter 3) - 15 Points Although business was off to a good start in January, Jamie realized that she will need to be profitable in order to continue as a viable business. Jamie discussed the subject of profitability with her accountant who suggested that she first needs to determine her breakeven point in both unit sales and dollars. He explained to her 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 levels in order to determine the amount of cakes it would need to sell to achieve the desired result. Since Jamie did not know how to perform this calculation and in order to save money, she asked you to calculate the company's breakeven point and the target sales need to achieve a monthly profit of $500. Required: Calculate J&J Bakery Inc's breakeven point in both units and sales dollars. Also, calculate the sales needed in order to achieve a monthly profit of $500. Use four decimal places in converting from total to per unit cost