where they produce high-quality cookies and a retail storefront. Not content to just the small retail counter, the pair doubled their efforts and are now operating a burgeoning food empire. In addition to their retail cookie operation, the pair are now operating a wholesale cookie business and are considering expanding into even more operations. A couple years ago, as their business grew, the co-owners hired a new Controller, a CPA to help them continue to grow and stay profitable. Now they just landed their largest customer yet, further boosting their wholesale business. In 2017 , the company had $6.1 million in sales revenue and is on track to do $9.3 million this year. ELAC Cookies uses natural and organic ingredients, and combines Remy's Parisian techniques with Linguini's unexpected takes on healthy cookies like the Spinach Cookie, the Brussels Sprouts Surprise Cookie, and a new KaleBeet Cookie. It offers three main product lines: - Singles, as the name suggests, are a single serving, served to customers at their small retail store. - Dozen packs, sold at their store but primarily wholesale sales to restaurants and grocery stores. Can be arranged as variety packs. - Jumbo cookies, sold primarily to restaurants and grocery stores. Remy and Linguini love getting feedback from their fans and are always testing new recipes based on suggestions. They often receive requests from food chains for different types and sizes of cookies, and must decide which ones to accept and which ones to pass on. Cookie Production Naturally, Remy and Linguini can't reveal their recipes, but they have provided some details on how the cookies are made. Most cookies go through a general four-step process: mixing, forming, baking and packaging. ELAC Cookies makes all three types of cookies on any given day, sometimes all three in the same day. The first step of making the cookies involves bakers mixing the ingredients of flour, butter, sugar, and the recipe's vegetable. Next, cookies are formed into different sizes depending on whether ELAC Cookies will be selling to retail customers, or to their wholesale venture. The formed cookies are then placed on baking trays, which will be put in the oven for 15 to 25 minutes at a time depending on size. After they've cooled for an hour, cookies are then packaged and labeled and placed on pallets ready to be delivered. Cookies don't take too long to produce, but for large wholesale orders it takes about a week to complete the entire order. Since contaminated food would lead to a visit by the Health Department (and possibly shutting down the kitchen), 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 cookies because workers need to pull different flavor cookies 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. 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 ELAC Cookies 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. 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 ELAC Cookies 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 ELAC Cookies' 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, ELAC Cookies' managers adjust labor hours up or down depending on the demand for cookies and try to keep the projected labor near 20% of sales. Costing Issues Remy and Linguini 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, ELAC Cookies 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, Remy and Linguini 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 workers to track their hours by job or batch. Linguini and Remy'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. The Controller has asked for help determining a product costing system ELAC Cookies 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 Remy and Linguini consider what a consumer is willing to pay the most important factor in pricing. They want to be sure to keep ELAC Cookies competitive with other companies. Table 1 provides selected actual cost and revenue data for May 2018. Additional information about costs can be found in the Notes to Selected Financial Data below. A history of ELAC Cookies ELAC Cookies, Inc. is the genius of two best-friend classmates at East Los Angeles College. Though almost inseparable through their Accounting class, the two parted ways after the course ended - Remy heading abroad to study the art of pasty making in some of the most elite patisseries in Paris, and Linguini pursuing his love of food (especially green leafy vegetables) by landing jobs in some of the finest restaurants in their hometown of Los Angeles. A chance encounter back in 2016 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) cookies - passing them out to friends and family, and building a grassroots fan base around town. When the operation outgrew Remy's family kitchen, Remy and Linguini applied for a small business loan. With it, they bought a small kitchen workspace in Monterey Park and became the proud owners of a 2,000 square-foot facility where they produce high-quality cookies and a retail storefront. Not content to just the small retail counter, the pair doubled their efforts and are now operating a burgeoning food empire. In addition to their retail cookie operation, the pair are now operating a wholesale cookie business and are considering expanding into even more operations. A couple years ago, as their business grew, the co-owners hired a new Controller, a CPA to help them continue to grow and stay profitable. Now they just landed their largest customer yet, further boosting their wholesale business. In 2017, the company had $6.1 million in sales revenue and is on track to do $9.3 million this year. ELAC Cookies uses natural and organic ingredients, and combines Remy's Parisian techniques with Linguini's unexpected takes on healthy cookies like the Spinach Cookie, the Brussels Sprouts Surprise Cookie, and a new KaleBeet Cookie. It offers three main product lines: 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: Remy and Linguini Brokers' commissions: Generally 4% of sales. Income Tax: Average total tax rate is 32%. Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher cost items such as flour, sugar, eggs, fruits and vegetables that appear on the package label. Flavor additives are relatively low-dollar cost items and a small part of the weight of the cookie 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, forming, 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. Phase One Your team's assignment Remy and Linguini are asking several firms to provide a proposal recommending what type of costing approach will help them determine more accurate cost information for ELAC Cookies' pricing and product decisions. Your firm has been invited to provide a proposal. In 500-1,000 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 ELAC Cookies 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 ELAC Cookies' 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 where they produce high-quality cookies and a retail storefront. Not content to just the small retail counter, the pair doubled their efforts and are now operating a burgeoning food empire. In addition to their retail cookie operation, the pair are now operating a wholesale cookie business and are considering expanding into even more operations. A couple years ago, as their business grew, the co-owners hired a new Controller, a CPA to help them continue to grow and stay profitable. Now they just landed their largest customer yet, further boosting their wholesale business. In 2017 , the company had $6.1 million in sales revenue and is on track to do $9.3 million this year. ELAC Cookies uses natural and organic ingredients, and combines Remy's Parisian techniques with Linguini's unexpected takes on healthy cookies like the Spinach Cookie, the Brussels Sprouts Surprise Cookie, and a new KaleBeet Cookie. It offers three main product lines: - Singles, as the name suggests, are a single serving, served to customers at their small retail store. - Dozen packs, sold at their store but primarily wholesale sales to restaurants and grocery stores. Can be arranged as variety packs. - Jumbo cookies, sold primarily to restaurants and grocery stores. Remy and Linguini love getting feedback from their fans and are always testing new recipes based on suggestions. They often receive requests from food chains for different types and sizes of cookies, and must decide which ones to accept and which ones to pass on. Cookie Production Naturally, Remy and Linguini can't reveal their recipes, but they have provided some details on how the cookies are made. Most cookies go through a general four-step process: mixing, forming, baking and packaging. ELAC Cookies makes all three types of cookies on any given day, sometimes all three in the same day. The first step of making the cookies involves bakers mixing the ingredients of flour, butter, sugar, and the recipe's vegetable. Next, cookies are formed into different sizes depending on whether ELAC Cookies will be selling to retail customers, or to their wholesale venture. The formed cookies are then placed on baking trays, which will be put in the oven for 15 to 25 minutes at a time depending on size. After they've cooled for an hour, cookies are then packaged and labeled and placed on pallets ready to be delivered. Cookies don't take too long to produce, but for large wholesale orders it takes about a week to complete the entire order. Since contaminated food would lead to a visit by the Health Department (and possibly shutting down the kitchen), 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 cookies because workers need to pull different flavor cookies 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. 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 ELAC Cookies 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. 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 ELAC Cookies 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 ELAC Cookies' 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, ELAC Cookies' managers adjust labor hours up or down depending on the demand for cookies and try to keep the projected labor near 20% of sales. Costing Issues Remy and Linguini 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, ELAC Cookies 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, Remy and Linguini 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 workers to track their hours by job or batch. Linguini and Remy'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. The Controller has asked for help determining a product costing system ELAC Cookies 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 Remy and Linguini consider what a consumer is willing to pay the most important factor in pricing. They want to be sure to keep ELAC Cookies competitive with other companies. Table 1 provides selected actual cost and revenue data for May 2018. Additional information about costs can be found in the Notes to Selected Financial Data below. A history of ELAC Cookies ELAC Cookies, Inc. is the genius of two best-friend classmates at East Los Angeles College. Though almost inseparable through their Accounting class, the two parted ways after the course ended - Remy heading abroad to study the art of pasty making in some of the most elite patisseries in Paris, and Linguini pursuing his love of food (especially green leafy vegetables) by landing jobs in some of the finest restaurants in their hometown of Los Angeles. A chance encounter back in 2016 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) cookies - passing them out to friends and family, and building a grassroots fan base around town. When the operation outgrew Remy's family kitchen, Remy and Linguini applied for a small business loan. With it, they bought a small kitchen workspace in Monterey Park and became the proud owners of a 2,000 square-foot facility where they produce high-quality cookies and a retail storefront. Not content to just the small retail counter, the pair doubled their efforts and are now operating a burgeoning food empire. In addition to their retail cookie operation, the pair are now operating a wholesale cookie business and are considering expanding into even more operations. A couple years ago, as their business grew, the co-owners hired a new Controller, a CPA to help them continue to grow and stay profitable. Now they just landed their largest customer yet, further boosting their wholesale business. In 2017, the company had $6.1 million in sales revenue and is on track to do $9.3 million this year. ELAC Cookies uses natural and organic ingredients, and combines Remy's Parisian techniques with Linguini's unexpected takes on healthy cookies like the Spinach Cookie, the Brussels Sprouts Surprise Cookie, and a new KaleBeet Cookie. It offers three main product lines: 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: Remy and Linguini Brokers' commissions: Generally 4% of sales. Income Tax: Average total tax rate is 32%. Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher cost items such as flour, sugar, eggs, fruits and vegetables that appear on the package label. Flavor additives are relatively low-dollar cost items and a small part of the weight of the cookie 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, forming, 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. Phase One Your team's assignment Remy and Linguini are asking several firms to provide a proposal recommending what type of costing approach will help them determine more accurate cost information for ELAC Cookies' pricing and product decisions. Your firm has been invited to provide a proposal. In 500-1,000 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 ELAC Cookies 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 ELAC Cookies' 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