Question Details

(solution) University of Toledo, Acct 3320 case study one. Need help.


University of Toledo, Acct 3320 case study one. Need help.


ACCT 3320

 

Dream Chocolate Case

 

Due date: October 12th, 2016

 

INTRODUCTION

 

Kay Johnson sat back in his chair wondering about what he had just done. He accepted a

 

special order from a national supplier of wellness products for 200,000 chocolate bars at a 20

 

percent discount from the usual price. It is a new type of bar and the company provided the

 

recipe. The company also hinted about a second order for 150,000 bars if the first order was

 

successful. Kay sighed and thought, ??I hope we can make a profit on this order, because we are

 

going to have to increase our capacity big-time to fill it. Wish I knew what the cost will be.??

 

OVERVIEW OF COMPANY

 

Dream Chocolate (D.C.) is the major product line of Salmon River Foods, the spawn of a trip

 

on the Middle Fork of the Salmon River in Boise, Idaho. President Kay Johnson was burned out

 

by 30 years in the food service industry and decided to sell his business and begin anew. Quite

 

by accident, he received a call asking if his new company Salmon River Foods would consider

 

selling

 

chocolate bars. Kay?s son Rob was employed by a German company and was frequently flying to

 

Europe and returning with wonderful chocolate as family gifts. Kay wondered how he could

 

produce European-style chocolate (no waxes or preservatives) in the U.S. With his son?s help, he

 

found a supplier in Germany who would ship to the U.S. Kay purchased a chocolate factory in

 

Boise and began production in April 2002. Kathleen Wasson, Vice President, oversees the

 

creative arts department and assists Kay in managing the plant.

 

What started with one basic milk chocolate bar has grown to include two milks, two darks,

 

two semi-sweets, one white, one bittersweet, and other adaptations involving various ingredients

 

such as coffee, berries, and fresh mint. The chocolate is wonderful, but the real charm of the

 

product is its custom labeling. For individual snacking, D.C. bars are sold in specialty markets,

 

fine gift stores, and other locations. They are also available for corporate events and celebrations,

 

such as weddings and birthdays.

 

Competitive Pressures

 

D.C. is a small company trying to survive in an industry with many players. Competition can

 

come from the many custom chocolate bar providers on the Internet (e.g., Custom Candy

 

Creations, Totally Chocolate, Carson Wrapped Hershey?s Chocolates, to name a few), as well as

 

from big chocolate companies (e.g., Mars, Nestle , and Hershey?s) who can always beat D.C. on

 

price. As such, it pursues any type of order it can get. The company?s niche is European-style

 

custom chocolate bars and labeling, and it is known for its flexibility and speed. For instance, a

 

small customer order can be printed, labeled, and ready for pickup or shipping within an hour if

 

the company already has the label in its system. Few, if any, of D.C.?s competitors can match this

 

turnaround time or its combination of high-quality bars, variety of flavors, and custom labeling.

 

Lagging Sales

 

Sales were about $500,000 in 2010. Demand was increasing in August and September 2010,

 

which are normally weaker months due to fewer special events. This gave D.C. management

 

1 great hope, but the continued national recession hurt sales in 2011 (as it did for most companies).

 

When asked about the issues D.C. faced at that time, Kay Johnson said that:

 

We need more business to utilize our capacity and make a profit. As we do so, the main

 

issue will be training people. It takes up to three months to train people adequately. Also,

 

custom labeling needs to be more effectively marketed. This is our best margin area. If

 

we focused our business on low-margin, high-volume chocolate bars we could be

 

vulnerable to customers dropping us for another supplier.

 

Costing Issue

 

It is now 2016 and D.C. is starting to get bigger orders, such as the one for 200,000 bars.

 

D.C. bars are also now being sold in some REI1 outlets around the country. As is common with

 

small companies, Salmon River Foods has an inadequate costing system. For example, it is

 

unable to compute actual costs per order or per bar. For pricing purposes, Kay estimates the costs

 

of each type of bar using his experience and knowledge of ingredient prices and what he pays out

 

each month in expenses. Each order is different, and typically ranges from 150 bars to 10,000

 

bars. It is difficult for the company to estimate an accurate cost for an order for pricing purposes,

 

so he really never knows whether orders are profitable or not. Kay wondered how to accurately

 

determine the cost for this new special order?the biggest order in the company?s history by far!

 

Adding to the challenge are limited resources for more accounting work. D.C. employs an

 

hourly wage Boise State University accounting graduate part-time to do its monthly bookkeeping

 

(books are closed at the end of the year). A local CPA does its financial statements, taxes, and

 

provides occasional advice. However, Kay now needs a new type of costing system to provide

 

accurate cost estimates, and is wondering what type of costing system makes sense for his small

 

but growing business.

 

PRODUCTION PROCESS

 

Making high-quality chocolate bars is a challenging process. The bulk chocolate must be

 

melted and flavored just right before being tempered, which is a process that aligns the crystals

 

in molten chocolate to produce the best texture balance of firm and creamy. Kay Johnson

 

described the challenges in achieving the right formula:

 

It?s a high-end process. The chocolate is temperamental, and, much like wine, there are

 

many different kinds, qualities, and layers of flavor. We try to make ours less sugary and

 

more pure, so that chocolate is the first thing you taste.

 

D.C. employs a full-time Master Chocolatier, who oversees the entire production process,

 

fills in at any area when there is a need, and performs most of the product inspections. Exhibit 1

 

provides a flow chart of the 3,000 square foot factory and the seven production areas, each of

 

which are discussed next.

 

1. Receiving Area

 

As soon as the bulk chocolate is received in the Receiving Area, it is dated and placed in the

 

1 REI is a national retail chain of outdoor clothing and equipment products (see: www.REI.com).

 

2 Imported Chocolate Storage area. Organic chocolate, which comes from a U.S. supplier, has a

 

separate shelf from the rest of the bulk chocolate. 3 2. Pouring Area

 

After the Pouring Area is cleaned and cleared of all non-organic chocolate (if necessary), the

 

bulk chocolate is brought to the melting pots to be melted. Any flavors (e.g., mint or lavender

 

oil) and ingredient additives (e.g., huckleberries or nuts) are added to the pots at the right time.

 

This process consists of tempering and pouring the chocolate into molds, then moving the molds

 

to the Cooling Tower. There are separate racks for organic and non-organic bars.

 

3. Inspection Area

 

Bars are taken out of the molds on the Chocolate Breakdown Table, and the newly formed

 

chocolate bars are placed on a rack in the Inspection Area. In the Inspection Area, the Master

 

Chocolatier weighs the bars and visually inspects each one for flaws. Flawed bars are sent back

 

to the Chocolate Rework Storage area to be re-melted and used again. There is very little waste

 

in the process and no by-products.

 

4. Foiling Area

 

After the chocolate is inspected, it is sent to the Foiling Area to be manually foiled. After

 

foiling, the chocolate bars are either sent immediately to the Labeling area to be completed as

 

??retail stock?? or put on the Foiled Product shelves to be held for future orders as ??bright stock.??

 

D.C. likes to keep bright stock on hand to be able to quickly fill future orders for the more

 

common sizes and flavors. Bright stock boxes are dated and used based on first-in first-out

 

(FIFO).

 

5. Labeling Area

 

In the Labeling Area, foiled chocolate bars are manually labeled and prepared for shipping.

 

Some retail stock orders are labeled with standard, pre-designed D.C. labels describing the

 

flavor, type of chocolate, and possibly a theme (e.g., ??The Wine-Lovers Bar?? or ??Think Pink

 

Dark Chocolate??). Other orders are for ??Custom Label Bars?? for advertising or special events

 

(e.g., weddings, store openings). These labels include things like company logos, photos,

 

paintings, and even resumes and personal business cards. D.C. requires a 150-bar minimum and

 

charges an additional amount for the custom label design costs, which can vary significantly

 

depending on customer needs. VP Kathleen Wasson edits the many retail and custom labels

 

produced for D.C. bars. All labels are printed on D.C.?s color laser printer.

 

6. Finished Product Storage Area

 

All labeled bars are stored in the Finished Product Storage Area until shipped or picked up by

 

customers. The company produces significant varieties of both bright stock and retail stock.

 

There are approximately 40-plus different flavor and size variations of bright stock in storage.

 

The retail stock has even more types of bars for different retail clients. 4 7. Shipping Area

 

The bars are invoiced, packed, and shipped out to the customer FOB shipping point. If

 

deemed necessary, the bars are packed in insulated material with a cold pack to prevent melting.

 

PRODUCT INFORMATION

 

D.C. sells many types of bars, with varying sizes, ingredients, and flavors. Although there are

 

other sizes available, D.C. typically sells bars in three standard sizes: 1.25 oz. (both organic and

 

non-organic), 3.0 oz. (non-organic only), and 3.25 oz. (organic only). This section describes the

 

ingredients, labor, and overhead required to make its bars.

 

Materials

 

Table 1 provides typical prices and costs of chocolate for the standard-sized bars. The bulk

 

chocolate is generally from German suppliers, but D.C. also has a U.S. supplier of high-quality

 

chocolate. Chocolate prices can vary, due largely to unstable conditions in major cocoa beanproducing nations such as the Ivory Coast. Standard chocolate bars, with no additional flavors or

 

special ingredients, comprise about half (47 percent) of total sales. Besides chocolate and other

 

ingredients, the product cost includes the foil and label. Table 1 provides the typical costs for

 

these items. Bars can have one or more types of special flavors and ingredient additives, such as the

 

recent order from the wellness company. The additional costs for these additives are handled in

 

different ways. Flavor additives are a relatively small part of the overall weight of the bar, and

 

primarily affect the taste of the chocolate itself. Bars with higher-cost flavor additives, such as

 

coffee and Kava, comprise about 13 percent of sales. These ingredients are added to the pot and

 

listed as an ingredient with a direct cost (e.g., $8 for two pounds of coffee used in a batch). Less

 

expensive additives, such as flavoring oils (e.g., mint or lavender), are not included in direct

 

costs as a little goes a long way. These costs usually show up in overhead. Sixteen ounces of oil

 

cost about $22, and D.C. uses only two ounces for a batch of 1,200 1.25-oz. bars. About 16

 

5 percent of product sales have these flavoring oils.

 

??Stir-in?? ingredients are a relatively larger part of the weight of the bar, are clearly

 

noticeable in the final bar, and affect the overall taste of the bar rather than the chocolate itself.

 

Bars with stir-in ingredients, such as huckleberries and all nuts, comprise about 24 percent of

 

sales and add additional direct materials and direct labor costs. Kay estimates $12 per pound

 

average for nuts, ginger, and huckleberries, and these ingredients become about 5 percent of the

 

finished weight of the bar. In addition to the direct materials cost for these ingredients, there is

 

additional labor required for stirring to achieve equal distribution throughout the bar.

 

Direct Labor

 

Four of the seven production areas have labor costs that should be included in product cost.

 

Direct labor comes from pouring, inspecting, foiling, and labeling. Table 2 provides the average

 

labor rates (including benefits) and estimated average number of bars that can be processed in

 

each of the four labor areas. Notice that larger bars can be inspected twice as fast as the smaller

 

bars. The reason is that larger bars have fewer defects, so less time is needed. Because each area

 

might be working on multiple customer jobs at a time, it is difficult to track labor hours for each

 

customer order. The extra labor cost for ??stir in?? ingredients is handled in one of two ways. If performed by

 

the Master Chocolatier, whose salary is included in plant overhead cost, Kay considers it as no

 

additional direct cost. If the Master Chocolatier is busy and other workers will be required, Kay

 

adds $12.50/hour of labor to each stir-in batch when estimating the cost of a job.

 

Overhead Costs

 

Overhead costs include administrative costs, supplies, three salaried employees (including

 

Kay, Kathleen, and the Master Chocolatier), an hourly wage customer service person, and lease

 

payments for the building. Table 3 provides a breakdown of budgeted overhead costs per month

 

of $19,800, on average. Note that each production area incurs costs for supplies each month. 6 Capacity and Output

 

Currently, the factory can pour up to about 300 pounds of 1.25-oz. chocolate bars per eighthour day. Different bar sizes can be produced in the same batch. However, as is usually the case,

 

total factory output is constrained by bottleneck processes, number of qualified workers, and

 

customer demand. Current budgeted production is 25,000 1.25-oz. bars and 1,000 3.0/3.25-oz.

 

bars per month, with an estimated average order size of 200 bars. Typically, two-thirds of

 

production is for organic bars. Kay tries to batch all the non-organic batches together and only

 

switch from organic to non-organic once a month (there is no difference in setup time between

 

the two types). There are typically two days of production in work-in-process between the

 

pouring and foiling areas because that is how long it takes to make and foil the bars.

 

Kay is optimistic that D.C. can produce the additional 20,000 to 25,000 bars per month

 

needed for the big special order, but he will need additional equipment and trained workers. He

 

will also need to add an extra shift, but he must train additional workers first. Training can take

 

up to two months to be able to meet D.C.?s high standard of quality.

 

Kay?s Cost Estimates

 

Table 4 shows how Kay estimates the cost of standard types of bars. When Kay estimates

 

costs to price a typical order, he adds materials (including ingredients, foil, and label), direct

 

labor, and overhead costs per bar to get the total estimated cost per bar. For overhead, he

 

allocates $0.69 per bar based on producing at the bottleneck rate and assuming an average of

 

20.5 work days per month, one eight-hour shift per day, and one worker per labor area. Markup

 

percentages vary and are affected by the size of the order and demand. When customers want a

 

significant discount from the normal price, he will usually decline unless there is a good chance

 

of future business. He accepted the big order because of the high volume and prospect for more

 

large orders. 7 8 9 ACTION ITEMS

 

Now put yourself in Kay Johnson?s shoes and think about what type of costing approach will

 

help you determine more accurate products costs for pricing different orders, like the recent big

 

order. In Part A, you will analyze D.C.?s situation, identify its information needs, evaluate the

 

pros and cons of different costing approaches, recommend an approach, and suggest ways to

 

implement it. If your instructor assigns Part B, you will calculate product costs based on your

 

recommended approach.

 

Part A: Choosing a Costing System

 

A1: What Information Does D.C. Need?

 

Before recommending a cost system, it is helpful to understand the cost information needs of

 

the company. Based on case information, briefly summarize D.C.?s competitive environment and

 

its apparent strategy in response to that environment. Considering the company?s strategy and

 

products, what types of cost information should D.C.?s product costing system be able to

 

provide?

 

A2: Which Costing Approach(es) Do You Recommend?

 

a: Discuss the pros and cons of the different costing approaches available to D.C., including

 

job order costing, process costing, activity-based costing or hybrid costing (i.e., blending

 

characteristics from both job-costing and process costing system). Based on your analysis of

 

costing approaches, which approach do you recommend D.C. Keep in mind it is a small

 

company with limited staff and they do not currently track actual cost information during

 

production. The approach should also be flexible enough to handle high-volume or low-volume

 

months.

 

b: Discuss how you would handle different types of special ingredients, stir-ins, or labeling

 

design costs for the new special order from the wellness company. You do not need to state how

 

you would handle each specific ingredient.

 

A3: Summary and Implementation

 

Summarize your recommended costing approach and discuss how it will help Kay determine

 

more accurate products costs for pricing different types of orders. What specific steps would you

 

take to implement the new product costing approach? Hint: think about what new information

 

would need to be collected and how you would collect it.

 

Part B: Calculate Product Costs

 

B1: Compute New Standard Product Costs

 

a: D.C. does not currently track actual cost information, but Kay has estimated some additional

 

production data provided in Table 5. Using the approach(es) you recommended in Part A and the

 

estimated data provided in Tables 1?5 and the Case, use Excel to compute estimated total cost,

 

profit margin, and margin percentage for each of the four jobs identified in Table 5, Panel A.

 

10 b: Compare your costs and profitability per bar to Kay?s estimates in Table 4. What is the

 

potential financial impact of using your method instead of Kay?s? 11 12

 


Solution details:

Pay using PayPal (No PayPal account Required) or your credit card . All your purchases are securely protected by .
SiteLock

About this Question

STATUS

Answered

QUALITY

Approved

DATE ANSWERED

Sep 13, 2020

EXPERT

Tutor

ANSWER RATING

GET INSTANT HELP/h4>

We have top-notch tutors who can do your essay/homework for you at a reasonable cost and then you can simply use that essay as a template to build your own arguments.

You can also use these solutions:

  • As a reference for in-depth understanding of the subject.
  • As a source of ideas / reasoning for your own research (if properly referenced)
  • For editing and paraphrasing (check your institution's definition of plagiarism and recommended paraphrase).
This we believe is a better way of understanding a problem and makes use of the efficiency of time of the student.

NEW ASSIGNMENT HELP?

Order New Solution. Quick Turnaround

Click on the button below in order to Order for a New, Original and High-Quality Essay Solutions. New orders are original solutions and precise to your writing instruction requirements. Place a New Order using the button below.

WE GUARANTEE, THAT YOUR PAPER WILL BE WRITTEN FROM SCRATCH AND WITHIN A DEADLINE.

Order Now