Ken's Cookies

Ken & Son manufactures oatmeal cookies in a plant spanning $80,000$ square meters, with $75\%$ of

that space devoted to cookie production and warehousing $($i$.$e$.,$ manufacturing$),$ and the remaining

$25\%$ allocated equally to sales and marketing and administration $($i$.$e$.,$ nonmanufacturing$).$ The

plant capacity is roughly $1,700$ batches per day $(1$ batch $=1$ dozen cookies$)$; the plant operates

$365$ days a year. Revenue and expense information follow. Neither Ken nor his son had any

involvement with manufacturing and their salaries were thus considered nonmanufacturing

expenses. All nonmanufacturing costs, except for sales commissions, were considered fixed.

Ken & Son

Noter:

$($a$)$ In $2007,$ Ken sold $3\mathrm{.}38$ million cookies at a price of $$0\mathrm{.}50$ per cookie.

$($b$)$ The production supervisor was not an hourly direct labor employee; Ken paid him a fixed salary.

$($c$)$ Electricity charges for the ovens varied with the intensity of the production schedule: more

cookies

baked meant the ovens were heated longer. Electricity charges for the freezer, however,

were

constant, regardless of production levels. Ken estimated that $40\%$ of the electricity bill related to

the freezers $($a fixed cost$),$ with the rest associated with the ovens $($a variable cost$).$

$($d$)$ General utility charges related to the lighting and climate controls for the entire plant

and were considered fixed as the plant operated year round.

$($e$)$ Maintenance and cleaning charges mostly varied with production levels $($ $$0\%),$ but a small

portion

$(20\%)$ existed regardless of the number of cookies being produced and were considered fixed.

These charges applied to production facilities only.

$($f$)$ This included items such as spoons and spatulas and was classified as variable overkead.

Assignments:

Classify the costs based on cost behavior and cost type.

Update T$-$accounts for the year

Prepare cost of goods manufactured statement

Prepare gross margin formatted statements of income for Ken & Son for the year ended August $2007.$

Prepare contribution margin formatted statements of income for Ken & Son for the year ended August $2007.$

Reconcile absorption costing $($GM statement$)$ and variable costing $($CM statement$)$ profits. There are no differences between

applied and incurred overhead so not adjustment to COGS is necessary.T$-$Account Flows: Ken's Cookies $($Gross Margin Formatted Income Statement$)$