Your close friend recently moved to Sydney after a decade of stints in some of the worlds largest law firms. Having experienced the hectic lifestyle of a corporate lawyer, she has decided that its time to quit the rat race and start her own local bakery. She invested her life savings into setting up a small bakery in Bondi, Sydney. She rented a small shop on the main esplanade with lots of foot traffic. She bought bakery equipment and hired five employees.

The bakery produces the following products: pies, lamingtons, danish pastries, doughnuts, finger buns and vanilla slices. The bakery sells pies and lamingtons in large quantities, so they are produced in larger batches, on the other hand, finger buns, danish pastries, doughnuts and vanilla slices are produced in small batches. The finger buns, danish pastries, doughnuts and vanilla slices are also complex to produce and require additional machinery setup and material handling.

Your friend does not know much about costing systems and to keep things simple had calculated the cost of each product by adding the material cost, labour cost plus a standard 10 percent of labour cost to cover for bakery overhead costs for a sample batch of 100 items. The finger buns, danish pastries, doughnuts and vanilla slices seemed to be very profitable products based on the costs determined by your friend. In the first month of operations, the bakery sold the following quantities of the products:

Product	Number of Items sold in May 2021
Pies	3000
Finger Buns	800
Lamingtons	2800
Danish pastries	600
Doughnuts	1200
Vanilla slices	200

Your friend did not seem very happy after the first month of operations. She said that profits were not what she had expected. She suspects that the costs upon which she based her prices were not very accurate. She has enlisted your help in setting up a costing system for her small bakery as she knows that you are studying management accounting in college. In order to assist your friend to setup a proper costing system, you decided to spend a day at the bakery to better understand the operations. Based on your observations and from casual talks with the employees you were able to gather the following information about the production. First, the production area at the back of the bakery is divided into 5 processes: mixing, baking, cooling, decorating and packing. You also noticed that not all products go through all of the processes. Therefore, you produced a summary table given below for each of the six products and the processes undertaken to produce them:

	Pies	Finger buns	Lamingtons	Danish pastries	Doughnuts	Vanilla slices
Mixing	Yes	Yes	Yes	Yes	Yes	Yes
Baking	Yes 4hrs/batch	Yes 3hrs/batch	Yes 30min/batch	Yes 1hr/batch	No N/A	Yes 45min/batch
Cooling	No	Yes	Yes	No	Yes	No
Decorating	No	No	Yes 45min/batch	Yes 1hr/batch	Yes 3hrs/batch	Yes 1.5hrs/batch
Packing	Yes	Yes	Yes	Yes	Yes	Yes

Secondly, you found out that when producing danish pastries, doughnuts, finger buns and vanilla slices, a significant amount of extra machinery setups and material handling is required compared to other more commonly sold products. Third, you noticed that baking times for the products vary significantly, and baking is one of the most prominent costs in the bakery as it requires specialist ovens, regular safety checks and uses a significant amount of electricity throughout the day. Fourth, items which require decorating need specialist bakers to make the products look pretty, which is considerably more labour intensive than the other products.

Based on your investigation and data collected about the production processes at your friends bakery, evaluate the suitability of the current costing approach for the bakery. Using your knowledge of the costing systems that you have learnt in the course, suggest a better costing system for the bakery and justify your suggestion. Explain how the new system that you suggested would provide more accurate costs for the products. Based on your suggestion, design the costing system for the bakery. In your design, identify the cost objects in the bakery and the common costs that would be incurred by the bakery (based on information provided above about the setup of the bakery). Then, explain how you would allocate the costs to the cost objects using the costing system that you have suggested.

Your friend wants also to introduce a new product to the bakery- themed birthday cakes. There is a lot of demand for this product in the locality. Before she decides on whether she will produce and sell this product in the bakery, she wants to work out the cost of producing the cakes. She thinks that the most popular themed cake will be a 10-inch SpongeBob themed cake. Identify the financial and non-financial information that you will need to collect as the first step towards calculating the cost of the cake.

Write a project report addressing the requirements above.