Managerial Accounting Project

Jakes Bake Shop

Facts

Jake is a pediatrician who was diagnosed with Celiac Disease at a young age. Along with his passion for caring for others, he also has a passion for food, especially cake. Once a month his office orders a cake from a local bakery to celebrate the birthdays of the office employees, but the gluten-free cake is never very good. Since his pediatric practice is quite successful, Jake would like to use the proceeds from the practice to open a gourmet gluten-free bake shop using his own recipe for the gluten-free cake. He would like to start off by baking just cakes and would like to eventually expand options to include cupcakes, muffins and cookies. The bake shop will only be open Thursday Sunday. Jake had never been interested in the operating aspects of a business, just medical research and baking. He currently has a manager run all business aspects of his pediatric practice, and he would like to hire you to manage his bake shop.

The facts are as follows (All costs are also included in the chart on page 4):

• Jake has incorporated the business as Jakes Bake Shop and contributed $100,000 into the corporation in exchange for stock.
• Jake plans to open the bakery on January 1, 2020 and will work at there on Saturdays and receive a salary of $250 per month.
• Jake would like to train new bakers on the importance of a gluten-free kitchen. He plans to work at least 1 day per month training employees and receive $50 per training day.
• Jakes brother, Sawyer, is a marketing executive and will take care of all of the advertising for the company. He will be paid $100 per month for his services and receive a commission of $1.00 per cake sold.
• Jakes mother, Elizabeth, is an accountant and will take care of all of the bookkeeping and taxes for a reduced fee of $150 per month.
• Jake has already hired a head baker and 2 part-time employees.
• The bakery will be located in the same complex as Jakes pediatricians office. Since he already occupies a location within the retail suite, the landlord is going to charge him just $1,000 per month. The location is extremely busy, especially on the weekend, and on well-travelled street.
• Because Jake insists on fresh, organic ingredients and delivering the best product to his gluten-free customers, all cakes will be made to order and are customizable for each customer.
• Selling Price Per Cake: Jake would like your help to determine the selling price per cake. Please look up industry averages for the suburban Boston areas Since this is a teaching example, you can choose the location that Jakes retail suite is located. Determine a price that is supported by your research into the location of your choice. Jake is selling a standard 10 round 3 layer vanilla cake.

Assignment

Although Jake isnt interested in running the day-to-day aspects of his businesses, he is very interested in how they perform. He has asked you to complete the following tasks and report back to him before the opening of the business.

1. Appendix B: Cost Classification

Jake has provided you with a list of supplies and equipment that he needs to start the business.

• Please classify the costs by behavior (fixed or variable), traceability (direct or indirect), financial reporting (product or period) using a chart.
• For fixed costs, please identify if they are discretionary or committed.
• For product or period costs, please identify if they are direct materials, direct labor, overhead, selling, or administrative costs.
• Remember that variable costs are per cake, while fixed costs are per month.

2. Appendix C: Costing System

Jakes mother, the accountant, told him about the three different types of costing methods that organizations use to classify costs, including job order, process costing and activity-based costing.

• Which method would you recommend that Jakes Bake Shop use? Please explain.

3. Appendix D: Break-even Analysis, Target Profit and Profit Planning

Jake developed a table to illustrate the costs associated with the business (pg 4).

• Include a comparison of your proposed selling price per cake with other competitors.
• Calculate your cost per cake and show your calculations.
• Calculate your fixed monthly expenses and show your calculations.
• Calculate how many cakes Jakes would need to sell per month in order to break-even.
• Calculate how many cakes Jakes would have to sell if he wanted to make a monthly profit of $500, $1,000 and $2,000?
• Prepare a Monthly Profit and Loss Budget based on a desired profit of $2,000. Please use a Contribution Margin Format and include the details of the various variable and fixed costs.

4. Appendix E: Alternative Expense

Jakes brother, the advertising executive, is hounding him about running a monthly radio ad that would cost $250 per month. Industry analysis shows this will bring in 5% more in unit sales per month. If you decide to run the ad for one month, how would the CVP analysis change? Would you recommend the ad?

February 1, 2020

During the month of January, Jake performed 1 day of training and the company sold 250 cakes. (Increase this by 5% in unit sales if you recommended running the advertisement.)

5. Appendix A: Report Preparation

• Monthly Profit and Loss Report (Contribution Margin Format) for January

• Budget to Actual Report (Contribution Margin Format) for January

• Income Statement (Traditional Format) for January

6. Business Brief: Report Analysis

Now that the business has been operating for 1 month, Jake would like you to complete an analysis of the reports that you prepared and provide your recommendations for the business using a business brief format.

Note: Avoid the inclusion of calculations and/or explaining computations; instead refer to Appendix A-E. Avoid duplicating information within this section.

Note: Although the business brief is step 6 in the assignment, this should be first in your response. Appendix A-E should be attached to the brief.

TABLE 1: COST INFORMATION

Supplies	Cost	Standard per cake
Cash Register	$10/month (3 year contract)
Refrigerator and Other Appliances	$0 (already included in rented space)
Other Baking Supplies	$0 (donated by Jake)
Gluten-Free Cake Flour	$60 per 25 lbs	2 lbs
Organic Eggs	$6.00 for 12 eggs	4 eggs
Organic Maple Syrup	$12.00 for 4 cups	1 cup
Organic Vanilla Extract	$18 for 8 ounces	2 tsp ($0.375/tsp)
Others - Baking Soda/Sea Salt/Other Spices	$18.75 for 5 lbs	2 tsp ($0.05/tsp)
Shortening	$5.00 for 5 cups	2 cups
Powdered Sugar	$3.50 per bag	bag
Cake Box	$15 for 150 boxes	1 box

Labor	Cost	Standard
Salary - Jake	$250/month $50/training day
Salary Head Baker	$800/month
Salary 2 Employees	$200 each /month
Marketing	$100/month $1.00/cake
Accountant	$150/month

Overhead
Phone	$65/month
Utilities (Electric, Gas, and Water)	$225/month
Rent	$1,000/month
Estimated Variable MOH	$2.00/cake