Introduction
It is important to note that the given project will establish a cookie company to produce and sell a single type of cookie. The plan is to apply the job order costing method and process costing method to calculate the cost per cookie and determine the sales price. In addition, it is necessary to compare and contrast these costing methods and discuss which one is more useful for managers. Thus, the analysis will focus on the impact of changes in the number of cookies sold on revenue. The process costing analysis is identified as the most relevant and suitable for the proposed bakery business.
Establishing the Cookie Business
The name of the cookie company will be Sweet Tooth Bakery, and it will be located in a busy shopping center downtown. The location was selected based on the high traffic flow of the area. The mission statement is as follows: ‘Our mission is to provide customers with high-quality, delicious cookies using fresh ingredients that are handcrafted with love and care.’ It was decided to produce and sell chocolate chip cookies as a product. The company will use the finest ingredients and a unique recipe to differentiate the cookies from those of the competitors.
Costing and Sales Information for Cookies
Firstly, it is critical to determine the cost of the job order. In order to calculate the cost per cookie using job order costing, it is necessary to identify the direct materials and direct labor costs involved in making 1000 chocolate chip cookies. The findings indicated that the top five ingredients are flour, sugar, butter, chocolate chips, and eggs (Qian et al., 2021). Their estimated costs and quantities are shown in Table 1 below.
Table 1 – Ingredient Costs.
Furthermore, it is helpful to make estimations for the cost of wages for two employees who will make the cookies. Based on industry standards, it is assumed that each employee will earn $15 per hour (Qian et al., 2021). It typically takes two days to make 1000 cookies, and each employee is to work for 8 hours per day. Therefore, the total direct labor cost is calculated as follows:
- Direct Labor Cost = (Number of Employees x Number of Hours x Hourly Wage)
- Direct Labor Cost = (2 x 16 x $15)
- Direct Labor Cost = $480
Considering that the manufacturing overhead cost is around 30% of the direct labor cost:
- Manufacturing Overhead = (30% x Direct Labor Cost)
- Manufacturing Overhead = (30% x $480)
- Manufacturing Overhead = $144
Therefore, the total cost per cookie using job order costing is:
- Cost per Cookie = (Total Cost / Number of Cookies)
- Cost per Cookie = (($21.50 + $480 + $144) / 1000)
- Cost per Cookie = $0.65
Table 2 below showcases the Job Order Cost Summary for Sweet Tooth Bakery.
In the case of the process costing method, there are three key processes to be noted. These include mixing, baking, and packaging, the former of which will be of prime interest for this part of the analysis. The cost per cookie is based on process costing with 40% conversion costs, and it is assumed that all 1000 cookies are mixed within two days by two employees, which is why this process is evaluated as a whole. Table 3 below showcases the process costing method values and price identification.
The cost per unit for the job order costing was equal to $0.65, whereas the cost per unit for the process costing was $0.69. On the basis of this cost information, it will be useful to price the product in round and simple numbers. The plan is to sell the cookies in 12-piece packages, and the process costing value will be used since cookies are not unique, which will be explained in Part 3 in more detail. Therefore, 12 * 0.69 = $8.28, which can be sold for $9.99, meaning around a 17% profit margin.
Comparison of the Costing Methods Used
When comparing and contrasting the costing methods used in this project, job order costing is used when products are unique or customized, whereas process costing is used when products are identical or similar. Job order costing provides more detailed information about the cost of each job, while process costing delivers a clearer understanding of the production cost per unit. As a manager, job order costing may be more useful when producing unique or custom products, as it offers a more comprehensive breakdown of the expenses associated with each job (Hansen et al., 2021). This can help with pricing decisions and cost control. On the other hand, process costing may be more useful when producing large quantities of identical products, as it provides a more accurate picture of the cost per unit, which can be helpful for production planning and cost control.
Since the project is mainly concerned with chocolate chip cookies, the products can be categorized as identical and non-unique. Therefore, it is more beneficial to use the process costing method and use its value to price the products accordingly. Costing methods are essential in any business that aims to control costs and maintain profitability.
While job order costing and process costing have their own advantages and disadvantages, it is important to select the method that best fits the nature of the products being produced (Hansen et al., 2021). As in the case of Sweet Tooth Bakery, process costing was more appropriate for producing chocolate chip cookies due to their non-unique and identical nature. By carefully selecting the most appropriate costing method, Sweet Tooth Bakery can ensure that it maintains its competitiveness and profitability in the cookie industry.
Discussion
If the number of cookies sold increases, revenue will increase, assuming that the selling price per cookie remains the same. On the other hand, if the number of cookies sold decreases, revenue will decrease. However, if the company reduces the selling price per cookie, it may be able to increase sales volume and compensate for the decrease in revenue (Hansen et al., 2021). It is important for the company to thoroughly evaluate the connection between price and volume to establish the best pricing strategy for maximizing revenue and profitability.
In addition, based on the given information, the cost per unit for job order costing is lower than the cost per unit for process costing (Hansen et al., 2021). However, this comparison is only valid for the specific production run analyzed in this project. In other cases, the cost per unit in job order costing and process costing can differ based on the characteristics of the products and the production method used.
Conclusion and Recommendations
In conclusion, establishing a cookie company requires careful consideration of various factors, including the selection of the type of cookie, location, and mission statement. The use of both job order costing and process costing methods was critical in determining the cost per cookie and pricing strategy. Job order costing was helpful in determining the cost of unique or custom products, while process costing provided a more accurate picture of the cost per unit for identical products. Therefore, it was more appropriate to use process costing for the chocolate chip cookies produced by Sweet Tooth Bakery.
Based on the analysis provided, it is recommended that Sweet Tooth Bakery use the process costing method to determine the cost per unit for its chocolate chip cookies. The company should price the cookies using the process costing value, which will help to simplify the pricing process and maintain a consistent profit margin. In addition, the company should carefully analyze the relationship between price and volume to determine the optimal pricing strategy for maximizing revenue and profitability. Finally, it is important to note that the cost per unit for job order costing and process costing may vary depending on the nature of the products being produced and the production process involved. Therefore, the company should review its costing methods regularly to ensure that it is using the most appropriate method for its products.
References
Hansen, D. R., Mowen, M. M., & Heitger, D. L. (2021). Cost management (5th ed.). Cengage Learning.
Qian, M., Liu, D., Zhang, X., Yin, Z., Ismail, B. B., Ye, X., & Guo, M. (2021). A review of active packaging in bakery products: Applications and future trends. Trends in Food Science & Technology, 114, 459-471. Web.