Your Role

While you believe you are a student currently taking BUS 217 for the purposes of this assignment you are doing your internship with the Chartered Professional Accountant (CPA) firm of Bob Belly (BB). BB specializes in providing accounting and consulting advice and analysis for Agriculture and Agri-Food businesses. For your first assignment,

BB wants you to work on the new client file, Jenna's Happy Cows Farm

(JHCF). The owners of JHCF have hired BB to advise them on the current situation and potential future developments. BB expects this engagement to include writing memos, performing quantitative and qualitative analysis as well as providing recommendations for the owners of JHFC. At all times, work submitted must be professional both in terms of content as well as presentation. This is not a university but rather the real world. Do the work as if your job depends on it, because it does!!

Jenna's Happy Cows Farm (JHCF)

Jenna, 26 years old, was born on a farm, and by 2020 she lived and worked with her mother, stepfather, and brother on their farm in Courtenay (110 minutes north of Nanaimo via the Island Highway). Jenna's family had a crop farm of just under 300 hectares, with 90% of the land certified organic. A secondary line of business (up to 25% of total revenues and costs) was a beef cow/calf operation, where they bought in stocker calves to raise. Another minor line of business (less than 3%), which was operated by her mother, comprised of raising laying chickens and turkeys in the summer.

Jenna participated in her family farm by running her own dairy farm that produced milk for animal consumption and then it grew to become Jenna's Happy Cows Farm (JHCF) which produces milk for human consumption in Courtenay. There were several neighboring farms that were successful in this business and she was interested in having similar success in the future. Jenna believed that the only key success factor in the dairy farm business was to be able to take care of the herd and milk it in an efficient manner. The rest of the efforts are the responsibility of the BC Milk Marketing Board (BCMMB). No sales effort or distribution planning has to be made for the milk produced within the quota, making it even more attractive for farmers versed in raising cattle. (See Appendix 1 for a summary of the dairy industry in British Columbia)

Jenna's experience breeding milking cows was reflected in the growth of her herd since she acquired her first cow in the year 2003; by 2020 she had a total of 100 heads (80 milking cows and 20 calves). JHCF produces several different products sold in health food markets and some of the larger supermarkets in the area as well as in the North Island Country Store, a small retail store located next to the farm. JHCF's products are well-known for their quality and have gained a strong brand-loyalty throughout the region in which JHCF operates. A key competitive factor for JHCF is that it uses only glass bottles in the packaging of its products, which appeals to many of its targeted customers.

Transcript of a meeting September 20^th, attended by Jenna, her mother, her stepfather, her brother, Bob Belly (CPA from BB), and the Student (You).

Everyone gathered around the kitchen table ...

Stepfather: Welcome to our humble home!

Bob: Thanks for a having us, it is really a pleasure to be here and drink your fresh milk.

Jenna: Ok, let us get to business. JHCF's sales have grown rapidly in recent years, but production is currently limited by the number and size of the facilities on site that can only accommodate 200 animals (of which 80 cows are part of the milking herd). As a result, I am considering expanding JHCF's operations to allow it to meet the increasing demand for its products. In order to expand, JHCF would have to buy additional land, build more barns and enlarge the milking facility.

Mother: Jenna is concerned about the potentially large financial outlays that we have to incur with expansion and she feels that she should examine whether or not current operations are efficient and cost effective before expanding.

Brother: Jenna is also considering the possibility of packaging the farm's product in plastic and paper containers instead of glass bottles. She expects that this would attract new customers, and in addition, it would reduce costs significantly.The direct cost of packaging the product (now $0.75 per bottle) would be about one-third the current cost, and the cost of the bottling equipment for filling the plastic or paper containers would fall to one-half the cost of the current equipment within 6 months' time.

Jenna: Yes, based on my estimates my brother is right and all other costs would remain the same.I think the sales of the farm's products would grow even faster with the broadened product line - the brand reputation of the farm's products could be leveraged to bring in new customers; and the use of plastic or paper containers would enable the farm to attract new supermarkets and other retailers that do not presently handle bottles.

Stepfather: We think that the supermarket customers would be willing to pay at least forty cents per quart more for JHCF products relative to other store brands.

Bob: Student, do you see? This is how the family business runs, everybody cares for everyone. Wouldn't you love to move to Courtenay and leave Nanaimo after graduating?

Student: I would, but my partner does not want to live in the middle of nowhere. I think that I will be leaving Nanaimo to Vancouver soon after graduating because of that.

Jenna: Ok, let us go back to my business. I subscribe to trade journals in dairy farming, and I have excerpted the following information from a recent issue (see Table 1). It shows the buying criteria of a sample of supermarket customers who were purchasing milk in plastic and paper containers (1 = most important, and 5 = least important). The current supermarket prices for these products in Vancouver Island are $1.25 per quart for each product except eggnog which sells for $1.80. Supermarkets mark up the price of milk by about 40% from dairy cost, so the price received by dairy is somewhat less.

Student: I thought that BCMMB will do the marketing for you and no sales effort or distribution planning has to be made by you as long as productions are within the quota.

Jenna: Please, I do not want legal advice from you, what I kindly need is a business sound advice supported by accounting. I am aware of the rules and the regulations that I have to follow. My ex-boyfriend is a lawyer and I often consult him for legal advice.

Bob: Jenna, what are the main processes involved in milk production at your facilities?

Jenna: Bob, I have prepared a detailed step by step description of our production process, please see attached Appendix 2.

Bob: I see that you are very well prepared, so how could we help you today?

Jenna: I still did not prepare a formal income statement for the year ended August, 31 2020. I was wondering if you could help me to do this first.

Bob: For sure, what do you have to show us?

Jenna:Here at JHCF, bottles are produced in one size - quarts.Selected data for the most recent year ended August, 31, 2020 are provided in Table 2. We also have a conventional accounting system which keeps track of overhead costs in four categories: bottling equipment, facilities, processing, and general and administrative. There are sub- accounts in each of these accounts except for bottling equipment. The accounts, sub- accounts and costs for the most recent operating year ended August 31, 2020 are shown in Table 3. We grow on site most of the feed needed at the dairy farm. The cost of producing the feed and some additional feed purchased during the year is included under labor and materials for other processing costs.

Bob: Jenna, anything else should we know about?

Jenna: Yes, Bob! In addition to the overhead costs, we have direct costs for bottles and other materials. These materials are purchased from a variety of suppliers. Each glass bottle costs us $0.75, including both purchase and recycling cost. Other ingredients include cocoa, sugar, and spices.Cocoa, used in the production of chocolate milk, costs

$0.05 per bottle. Sugar, used in both chocolate milk and eggnog, costs $0.05 per bottle. Spices and eggs, used to make eggnog, cost $0.08 per bottle. During the most recent year, in total, 65,700 ounces of sugar and cocoa were used in the production of chocolate

milk, and 76,650 ounces of sugar and spice and 15,600 dozen eggs were used in the production of eggnog.

Bob: Student, you heard the lady. Could you please prepare a formal income statement with all the necessary supporting schedules?

Student: Yes, Mr. Belly. I will for sure most definitely and you just don't worry about it.

Jenna: Bob, I also would like to know on average the number of bottles of milk that I need to sell every year so I can at least cover all my expenses.

Bob: Student, could you please use the income statement of August 31, 2020 to help the young lady? She wants to know approximately on average how many bottles JHCF needs to sell every year in order to at least breakeven? Student, is that clear?

Student: Yes, Bob! After I prepare the formal income statement using the traditional based, I will rearrange the income statement using the contribution margin approach. Then, it is easy to compute the weighted average contribution margin per bottle of milk, and after I will use the formula to compute the breakeven point in bottles of milk.

Bob: I am very happy that things are moving along. Could I please have some cookies? Mother: Here are some homemade cookies, Bob. It looks like you did not have lunch? Bob: I did have my lunch, but I have a sweet tooth and your milk is so fresh and tasty.

Jenna: OK, back to business. I have heard from a local vendor that information from an activity-based costing would be helpful to me in improving JHCF's operations. With some guidance from a cost consultant recommended by the vendor, I was able to identify eight activities related to production and sales at JHCF (see Table 4). I have further analyzed the cost structure, to determine how the overhead (resource) costs could be allocated to the eight activities identified above. On the advice of the cost consultant, I determined that all costs in the general and administrative account could be allocated to the general and administrative activity.Moreover, most (90%) of the costs in the bottling machine account could be allocated to the bottling activity, and the remainder to the receiving and inspecting activity. Determining how the other processing costs could be related to the activities is not as simple, but after some careful study I made estimates for the other processing costs (see Table 4).

The other facilities cost account includes the costs of maintaining the warehouse and milking barn, and is allocated to the activities on the basis of square feet. Square feet is therefore the resource-consumption cost driver for the other facilities cost account, which is one of JHCF's overhead (resource) accounts (see Table 5).

Bob: Jenna, I am very impressed and I am not just talking about the milk and cookies! How could we assign the costs of those activities to your five different product lines?

Jenna: Bob, some of the milk and cookies were supposed to be for you to take home to your kids. After some additional study, I decided that the best way to allocate the costs of each activity to the products was to use the activity-consumption drivers identified in Table 6. I still need your help to determine the profitability of each product line using activity-based costing. Also, I would like to know the implications of the report on my decision to expand my operations.

Bob: My kids are lactose intolerant, but I love to take a few bottles of chocolate milk to my secretary at the office. She loves chocolate, so do I! Student, please did you pay attention to what Jenna has just mentioned? Are you able to satisfy her requests?

Student: Yes, I understand that I need to apply ABC to determine the costs of each one of the five product lines. The first step is to identify the resources that should be allocated to each one of the eight activities based on Jenna's previous discussion and the consumption ratios in Tables 4 and 5. The second step to assign the cost of each one of the eight activities to the five product lines based on the suggested cost drivers identified in Table 6. At the end, I would know if my math is correct or not because the total net income of the five product lines combined should equal to the net income of August 31, 2020.

Jenna: Student, I would love to know if there are better cost drivers that I could use in the future than the one I suggested in Table 6. Also, what are the advantages and disadvantages of implementing ABC, in general, and at JHCF? Should I do it?

Bob: Student, you heard the lady. Anything else, because I need to get home soon.

Jenna: Yes, one last thing. What do you think about my idea to change from glass to plastic and paper containers? Could please provide with some recommendations supported with numbers and rationale?

Bob: Student, you better be prepared to do this assignment because I am not sure that I can. I guess you can do profitability analysis and integrate some marketing ideas.

Student: Don't worry, Bob. I will have everything ready for you on time. If I have any questions I will ask my teacher because she loves to help and she is always there for us.

Stepfather: Bob, are you sure you don't want to visit washroom before heading home?

Bob: No worries, I am always prepared with a backup plan. Student, don't wait until the last minute to do your assignment because it will take some time for you to finish it.

Student: Do not worry; I will have it ready before the deadline!

Jenna's Happy Cows Farm (JHCF)

Required:

Show all detailed computations and keep it professional! Prepare a professional memo to the Jenna to address all the following questions:

(1)Prepare an income statement using the traditional method for Jenna's Happy Cows Farm for the year ended August 31, 2020. Make sure you provide all the detailed supporting schedules and computations.

(2)A calculation of break-even point (in bottles) for the year ended August 31, 2020. Clearly identify your assumption regarding the sales mix in your calculation and specify why this assumption is important in the context of CVP analysis.

(3)Using activity based cost prepare a report to show the profitability of each of the five product lines at JHCF. Make sure you provide all the detailed supporting schedules and computations.

(4)Identify and discuss the strategic issues that may arise from the results of your

product profitability analysis and Jenna's plans to grow her operations.

(5)A listing and justification of other potential cost pools and cost drivers that could be used by JHCF, in addition to the cost pools and cost drivers listed in Table 6. Should Jenna switch to ABC at JHCF? Identify Pros and Cons of implementing ABC by Jenna.

(6)A description of potential implications on sales and profitability if Jenna changes the containers from glass to plastic and paper. Should Jenna do the changes of containers?