Baking Cookies: progressive lessons in cost accounting.

Niles, Marcia S.

BAKING COOKIES

The body of the case consists of a brief description of each of the four assignments. The assignments themselves are included as tables numbered 1 through 4. Note that the assignments have some aspects that are general. This helps students build judgment and decision making skills and gives students a feel for the decisions that face managers and managerial accountants.

Cookies 1 The first assignment, presented in Table 1, involves several activities that are well within the skill set of any student at the beginning of a managerial accounting class. Students must research and find a cookie recipe, which may involve using the Internet. They must go to a store and price the ingredients, giving them a feel for practical product costing. Then they must begin to think about how costs behave. This ties in well with text material covering cost-volume-profit relationships. Finally, they must do some simple arithmetic to divide costs such as five pounds of flour to their batch of cookies requiring three and a half cups of flour. The instructor may also use this assignment to de-mystify accounting and also to help students understand that even in classes, they need to perform a basic reality check: there have been students who initially reported a cost for vanilla of $15 used in a single batch of cookies!

Cookies 2 Cookies 2 as portrayed in Table 2 continues the lessons of the first assignment with more challenging tasks. It introduces a simplified set of indirect/overhead costs to be allocated to the cookies. Cookies 2 forces the student to think through a production process and perform some work flow analysis. It then takes the student through several breakeven exercises. The concept of capacity is introduced in step 3. Students, in this step 3, must take their workflow analysis and apply it to determine capacity. The last element of the assignment introduces simple flexible budgeting. Cookies 2, as presented in Table 2, uses a single worker as the base line, and then allows students to expand to three workers, exercising their entrepreneurial skills.

Cookies 3 Cookies 3 (Table 3) builds on previous assignments by exploring traditional cost allocation measures consistent with those in most managerial or cost accounting texts. Students first attach full costs to a batch of cookies using a single overhead rate. They may choose their own denominator activity. Then students use a more complex two-step allocation scheme. They divide their process into departments, allocate service costs, and then allocate departmental costs to a batch of cookies. Finally students compare the two methods. If the class is focusing on more detailed manufacturing costing, an additional step that may be useful is to have students present the flow of a cookie batch through a T-account representation, supported by journal entries.

Cookies 4 Cookies 4 (Table 4) brings cookie production into the new manufacturing environment and winds up the set of cases. Students must once again think through the cookie-making process as a set of activities and attach costs to the identified activities rather than to departments and subsequently assign the costs to batches of cookies. These processes may overlap those in Cookies 3, but should differ in some respects. Once again students are asked to reflect on the three methods in the two assignments. It helps them recognize that each method may result in different costs of a batch of cookies and therefore flows into product pricing decisions, production planning and profitability.

The four cases outlined above have been used over several years in an upper division accounting class for non-accounting majors. It has proved to be a popular way of teaching the material and of showing students how accounting may be useful to them in their careers. It has been mentioned in post-semester evaluation as the best course assignment.

Marcia S. Niles, University of Idaho

Table 1

Cookies 1: In this assignment, you will begin to analyze costs for
a simple product: cookies. You may complete
this assignment, and subsequent cookie assignments, in groups of up
to 4 people.

Here are the steps in this assignment:

1. Obtain a cookie recipe. If you cannot find one at the library or
do not have one, I'll have a couple recipe books
in my office or find one on the internet (for example look at
www.yahoo.com/entertainment/foodandeating/recipes/cookies).

2. Set up a table with the following columns: Ingredient, quantity,
cost and behavior (variable, fixed or mixed).

3. Go to a store and price the ingredients. You will have to do
this in two steps. For example, flour may be sold
in 5-pound quantities, and your recipe calls for 3 cups. So you'll
have to calculate how many cups per pound
to get the cost per cup. Include your calculations in a supporting
table. Also include the name of the store at
which you "shopped."

4. What is the total ingredient cost for a batch of your cookies?
What is the cost of a single cookie?

Table 2

Cookies 2

1. Use your recipe from Cookies 1. Make any adjustments you
consider necessary to make your cookies more
realistic or more cost-effective. Document all changes.2. Expand
your product costing by assuming:

** You rent a kitchen/shop for $175 a month.

** You pay $.50 an hour for electricity whenever you are working,
plus a $10 a month base fee.

** You produce cookies 40 hours a week with your single worker
making $10 an hour.

** Your indirect costs, all fixed, are $400 a month.

** Packaging materials cost $.03 a batch.

2. Determine how long it will take for each batch of cookies from
start to finish. Present this in table form. Next,
divide this into your available hours to determine your capacity in
batches of cookies.

3. Price your cookies. The price per cookie should have these
characteristics: it allows you to make a profit and
it seems reasonable. You may add a worker to increase volume,
however, you cannot expand beyond three
workers in your current space. Assume you can sell all the cookies
you make.

4. What is your breakeven?

5. What is your breakeven if you want to pay yourself?

6. What is breakeven if your ingredient costs increase 10%?

7. Develop a monthly flexible budget for 50 batches below
breakeven, breakeven and 50 bat ches above
breakeven.

Table 3

Cookies 3

1. Show your supporting calculations. When you make conclusions,
explain your reasoning.1. Assume we are accounting for a single
month. Assume that the $400 indirect costs consist of maintenance
$150 a month, depreciation $75 a month and cost accounting $125 a
month. You may need to use a little imagination.

2. You want to know the full cost of your cookies. Design a scheme
that will allocate your fixed and indirect costs to each batch of
cookies based on a single overhead rate (that is, the traditional
allocation system). Choose your allocation base carefully.

3. What is your total cost of a batch of cookies?

4. Now separate your cookie making process into three departments.
You will use a two-step allocation process. Decide how many labor
hours (and dollars) are used in each department. Assume each
department has the same number or square feet. Choose an
allocation base for your electricity and other indirect costs to
attach costs to each of your departments. The departments will then
allocate to a batch of cookies based on direct labor hours. What is
your overhead rate for each department?

5. What is your total cost of a batch of cookies? A single cookie?

6. Compare your cost per batch or cookies in step 3 with your cost
in step 1. Reflect on the difficulty of obtaining
the two rates and the quality of information that you receive.

Table 4

Cookies 4

1. Now assume that you are going to implement an Activity Based
Costing (ABC) system. Think through the cookie making process and
classify all the activities for making your cookies. Group them
so you don't end up with more than three or four. There may be some
overlap with the departments you identified in Cookies

3 but they should not be identical.

2. Analyze your indirect and fixed costs to determine proper
activity bases for your activities.

3. Determine the costs of each activity that you identified in step
1.

4. Identify the use of each activity base used by a batch of
cookies and a single cookie. What is the total cost of
a batch of cookies and of a single cookie under ABC?

5. What are the advantages and disadvantages of each of the three
methods you have developed in Cookies 3 and 4? How might the
choice of method influence your selling price?