Management Accounting

All characters and company information and names in this case document are fictitious. Any resemblance to real

persons, living or dead, or companies is purely coincidental.

Stage 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, N.C.

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 2013, the company had $6.1 million in sales revenue and is on

track to do $9.3 million this year.

Humble Pies 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 three main product lines:

? Singles, as the name suggests, are a single serving, ready to eat on a plate.

? 9?inch pies are pre?sliced and sold to distributors for food service applications or grocery in?store

bakery cases.

? 10?inch pies are packed in strong, clear plastic domes to be sold in refrigerated cases and with

custom labels. The pies are available as a variety pack, a duo?pack (two different flavors) or a full

pie.

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 pies, and must decide which ones to accept and which ones to pass on.

Pie production

Naturally, Linda and Taylor can?t reveal their recipes, but they have provided some details on how the pies

are made. Most pies go through a general four?step process: mixing, filling, baking and packaging. Humble

Pies makes five different crusts mixed in large batches, and fillings are produced in smaller batches

depending on the production schedule. Next, crusts are filled with, well, the filling and placed on trays for baking (15 to 25 at a time depending on size). 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 pie

product order and the plant uses just?in?time production methods. The goal is to produce a pie every five

seconds.

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 three product lines, the process is virtually the same regardless of the flavors or ingredients.

But the processes between the product lines can be very different (e.g., packaging for variety packs takes

much longer than for whole pies because workers need to pull different flavor slices and place them on the

same tray). Not to mention the packaging varies?some go in boxes while others go in plastic containers,

and some package tops and labels take longer to place than others. 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 eight

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 $8.50?$12.50 per hour) to get expected monthly gross pay amount for each hourly

employee based on a 40?hour workweek.

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. And, since the company does not currently track labor

hours by product, 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

Page 3

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?: cost, 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 2014.

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 2014)

Cost Category Behavior May 2014

Sales $766,667

Expenses:

Raw Materials Variable $327,934

Bakery labor Mixed $158,767

Administration 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

Rent expense Fixed $19,167

Telephone & Internet Fixed $2,300

Co?owners? salary Fixed $25,300

Brokers? commissions Variable $30,667

Total Expenses $697,042

Operating Profit $69,625

Income Tax $22,280

Net operating income $47,345

Unit volume 64,500

Average Operating Assets $5,500,000

Minimum Rate of Return 8.00%

Page 4

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.

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, packaging and 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%.

Page 5

Your team?s assignment

Linda and Taylor are asking several firms to provide a proposal recommending what type of costing

approach will help them determine more accurate cost information for Humble Pies? pricing and product

decisions. Your firm has been invited to provide a proposal. In no more than 1,000 words, write an

executive summary addressing the following questions (charts and tables with numerical values and

calculations will not be included in the word count):

1. What information does Humble Pies need? Before recommending a cost system, it is helpful to

understand a company?s information needs. Based on case information, discuss the types of cost

information Humble Pies? product costing system should be able to provide.

2. Of the expenses listed in Table 1, determine which should be treated as product costs and which

should be treated as period costs for management decision making?

3. For each product cost you identified, how would you track the cost? For example, would you track

it by individual job, batch, production step, activity, general factory overhead, etc.? Separate raw

materials into main ingredients and flavor additives. Also, separate bakery labor into four

categories: production line (includes mixing, filling and baking), packaging, sanitation and

warehouse.

4. For each specific cost item you listed in question 3, how would you assign that cost to products to

attain reasonably accurate product costs? For example, would you compute standard costs, trace it

specifically to a customer order, or assign it using an allocation base (and identify the allocation

base you would use). Again, separate raw materials into main ingredients and flavor additives.