Royal biscuits inc has a very select but highly respected product portfolio. They produce 3

different kinds of fine biscuits.

-supreme crisp: A light wafer cookie with dark chocolate crme filling

-tropical chocolate : A heart-shaped cookie enrobed in smooth Belgian chocolate, with a touch of

orange flavor.

- sublime roll : A thin crepe rolled into an elegant flute, drizzled with a hint of dark chocolate.

All biscuits have the same main ingredients ( chocolate, butter, sugar and flower) complement

with biscuit specific ingredients. Royal Biscuits Inc. only works with top quality suppliers who

charge $8 per kg of chocolate, $ 4 per kg of butter, 1 $ per kg of sugar and $0,35 per kg of

flower. All other ingredients are purchased at an average price of $ 1,5 per kg . To produce 1 kg

of supreme crisps, Royal Biscuits Inc. needs to purchase 200g of chocolate, 150g of butter, 250g

of sugar, 250g of flower and 150g of other ingredients such as vanilla powder, eggs, ... for 1 kg

of Tropical chocolates, they need 200 g of chocolate, 250g of butter, 150g of sugar, 250g of

flower and 150g of other ingredients. The third product, the sublime rolls, are made of 50g

chocolate, 250g butter, 200g sugar, 250g flower and 250g other ingredients.

Royal biscuits Inc. employs 4 full time production workers in its production hall, working in 2

shifts. A production worker works 1750 hours every year at practical capacity and at a cost of $

25 per hour. In case of temporary technical unemployment, the production workers receive an

unemployment benefit from the government and Royal Biscuits Inc. does not have pay any

supplementary compensations. To produce 1 kg of supreme crisps , Tropical chocolates and

Sublime rolls, respectively 0,09; 0,08 and 0,12 labor hours are required. In addition, the company

has 1 person(FTE) in charge of maintenance. He also works an average of 1750 hours a year but

earns only $19 per hour. A few years ago, Royal Biscuits Inc has invested in 3 new production

process of Supreme crisps takes 0,16 machine hours per kg, the process of Tropical chocolates

takes 0,12 machine hours per kg and producing the Sublime rolls takes 0,13 machine hours per

kg.

Annual depreciation of the machines is $134000. The cost of power and other supplies to run the

machines is $ 3 per machine hour for the Supreme crisp production line, $2 per machine hour for

the Tropical chocolate production line and $2,5 per machine hour for the Sublime roll production

line. As such, the cost of power and supplies is considered to be a direct cost.

William Kensington calculated that there were $16300 general administration costs linked to the

production, and that Royal Biscuits Inc pays a total amount of $30000 rent for the administration

building and the production hall. Management receives $48760 for running the business.

Distribution costs and selling costs, both non related to production, amount respectively $18450

and $7800 per year.

Royal Biscuits Inc has a total shareholders' capital of $12500000 and outstanding debt of

$1100000 at 7% the current tax rate is 39%

Allocation of costs

Knowing these costs, William Kensington

had to make a decision about how to allocate the

overhead costs. The allocation needed to be both logical and uncomplicated. After a long

discussion with Jim Martin, they decided it would be best to allocate the maintenance and

depreciation costs based on the machine hours. All other indirect costs linked with production

would be allocated based on direct labor hours.

Assignment questions

1- Calculate the standard cost of 1 kg of Supreme crisps, Tropical chocolates and Sublime

rolls, with the full costing method, using practical capacity as a denominator. This will

allow William Kensington to review its selling prices.

2- At the end of the year, it becomes clear that the purchase price of chocolate increased to

$8,65 per kg. A marketing study performed by an outstanding marketing office revealed

that in order to increase sales, the flavor of the Supreme crisps should be adapted.

Therefore, the recipe of Supreme crisps was changed. Royal Biscuits Inc. needed to

purchase 150g of chocolate and 200g of butter to produce 1kg of the new Supreme crisps.

In addition the production workers hourly cost increased from $25 to $26,5. Calculate the

actual costs per Kg of the 3 products, using the full costing method. The actual sales

volume consists of 22,500Kg of Supreme crisps, 16,300kg of Tropical chocolates and

20.880Kg of Sublime rolls.

3- Compare actual and standards. Calculate and analyze the following variances:

a-

Direct materials variance, direct labor variance and manufacturing overhead variance.

b- Supreme crisp variance, Tropical chocolates variance and Sublime roll

variance( these variances only include the direct costs)

4- Royal Biscuits Inc. sells it Supreme crisps at $13,2/kg, its Tropical chocolates at

$14,8/Kg and its Sublime rolls at $11,5/kg. Given the actual sales volume, how will the

income statement look like using.

a-

Standard full costing at practical capacity ?

b- Actual costing ?