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Managerial accounting Practice Case - Humble Pies, Inc.




Question;Practice case Managerial accountingNon-GradedStage OneA history of Humble PiesHumble Pies, Inc. is the genius of childhood neighbors and best friends Linda Jackson and TaylorJohnson. Though almost inseparable through high school, the two parted ways after graduation?Lindaheading abroad to study the art of pasty making in some of the most elite patisseries in Paris, and Taylorpursuing his love of food (especially bacon) by landing jobs in some of the finest restaurants in theirhometown of Charlotte, N.C.A chance encounter back in 2005 reunited the two and got them talking of their mutual love of food andwhat they?d been learning. Soon they were spending their free time crafting quirky but sophisticated (notto mention delicious) pies?passing them out to friends and family, and building a grassroots fan basearound town. When the operation outgrew the Jackson family kitchen, Linda and Taylor applied for a smallbusiness loan. With it, they bought a small pie factory in Charlotte and became the proud owners of a60,000 square?foot facility where they now produce high?quality pies.A couple years ago, as demand for the pies grew to a national market (thanks to the company?s Instagramaccount), the co?owners hired a new Controller, a CPA with her Chartered Global ManagementAccountant (CGMA) designation from their CPA firm to help them continue to grow and stay profitable.Now they just landed their largest grocery store yet. In 2013, the company had $6.1 million in salesrevenue and is on track to do $9.3 million this year.Humble Pies uses natural and organic ingredients, and combines Linda?s Parisian techniques withTaylor?s unexpected takes on classical southern desserts like Bacon Chocolate Chess, Avocado Key Limeand Chai Apple Pie. It offers three main product lines:Singles, as the name suggests, are a single serving, ready to eat on a plate.9?inch pies are pre?sliced and sold to distributors for food service applications or grocery in?storebakery cases.10?inch pies are packed in strong, clear plastic domes to be sold in refrigerated cases and withcustom labels. The pies are available as a variety pack, a duo?pack (two different flavors) or a fullpie.Linda and Taylor love getting feedback from their fans and are always testing new recipes based onsuggestions or grocer suppliers? needs. They often receive requests from food chains for different typesand sizes of pies, and must decide which ones to accept and which ones to pass on.Pie productionNaturally, Linda and Taylor can?t reveal their recipes, but they have provided some details on how the piesare made. Most pies go through a general four?step process: mixing, filling, baking and packaging. HumblePies makes five different crusts mixed in large batches, and fillings are produced in smaller batchesdepending on the production schedule. Next, crusts are filled with, well, the filling and placed on trays forPage 1baking (15 to 25 at a time depending on size). After they?ve cooled for an hour, pies are decorated, sliced,packaged and labeled and placed on pallets to freeze until shipped. It takes about a week to complete a pieproduct order and the plant uses just?in?time production methods. The goal is to produce a pie every fiveseconds.Since contaminated food would lead to a visit by the Health Department (and possibly shutting down thefactory), there are at least three sanitation workers on duty at all times. Generally, there are 3?4warehouse workers on duty to handle the shipping, receiving and storage of raw materials and finishedproduct. The plant typically runs two shifts per day with two production supervisors assigned to each shift.For each of the three product lines, the process is virtually the same regardless of the flavors oringredients. But the processes between the product lines can be very different (e.g., packaging for varietypacks takes much longer than for whole pies because workers need to pull different flavor slices and placethem on the same tray). Not to mention the packaging varies?some go in boxes while others go in plasticcontainers, and some package tops and labels take longer to place than others. Humble Pies seldom placesits own labels and logo on any of their products. Label designs generally come from the customer, so theyvary based on each order.The plant currently has capacity to do $1 million in sales per month, but with additional investments inovens, mixers and workstations (for about $500,000) it could increase to $1.5 million. October throughDecember tends to be a higher volume period (with increased demand for holidays like Thanksgiving andNew Year?s), resulting in Humble Pies getting roughly 60% of its business during that time period. Becauseof the rush, the plant runs overtime and weekend shifts as needed to get the product to its suppliers. Theowners believe the labeling process significantly slows down production time.ReportsHumble Pies? managers rely heavily on a ?Labor Report? to manage its work force. The report lists eightsalaried workers and approximately 50 hourly employees, expected number of work days for the month,hours per day (typically 8) and total projected hours for the month. The hours are multiplied by theemployee pay rate (from $8.50?$12.50 per hour) to get expected monthly gross pay amount for each hourlyemployee based on a 40?hour workweek.The sum of all expected hourly employee gross monthly pay amounts are added to the salaried productionworkers gross monthly pay and the projected total payroll added costs (Employer taxes, Social Security,etc.) to get ?total labor dollars? cost for the month. The total labor dollars are divided by projected salesrevenues to get a ?projected labor percentage.? Management watches this number pretty closely and triesto keep it around 20% of sales. In the past, it was assumed that labor costs for the company did notchange with sales volume, and some months were profitable and some were not. Currently, Humble Pies?managers adjust labor hours up or down depending on the demand for pies and try to keep the projectedlabor near 20% of sales.Costing IssuesLinda and Taylor are skilled at determining the cost of ingredients, but when it comes to labor and theoverhead of each product line, they?re not sure where to start. At the moment, Humble Pies allocates thesame amount of overhead costs to every output unit. While total labor averages 20%, they believe that laborand overhead costs vary greatly by product. And, since the company does not currently track labor hours byproduct, Linda and Taylor have no idea of labor cost or profitability by product line. A digital biometric timeclock keeps track of hours for the employees, but management is open to asking shiftPage 2workers to track their hours by job or batch. Taylor and Linda?s primary concern is making sure there isa good reason to change the method and that there?s a simple and low?cost way to track it.The company has a small but growing administrative staff that can do some basic record keeping while theController manages financial reporting, taxes and decision analysis, a skill she developed while working towardher CGMA designation. The Controller has asked for help determining a product costing system Humble Piescan use for pricing decisions, product line profitability analysis, financial planning and helping managersunderstand the business. But costs are only one component. The company currently bases pricing decisions onthe ?three C?s?: cost, consumer and competition. As a bare minimum, the company wants to achieve a target17% gross profit margin (or higher) on cost, but Linda and Taylor consider what a consumer is willing to pay themost important factor in pricing. They want to be sure to keep Humble Pies competitive with other companies.Table 1 provides selected actual cost and revenue data for May 2014. Additional information about costs canbe found in the Notes to Selected Financial Data below.Table 1: Selected Financial Data (actual cost and revenue data for May 2014)Cost Category Behavior May 2014Sales $766,667Expenses:Raw Materials Variable $327,934Bakery labor Mixed $158,767Administration Salaries Fixed $41,367Supplies Variable $3,833Freight & Shipping?In Variable $4,907Freight & Shipping?Out Variable $64,707Utilities ? Electricity Variable $9,813Utilities ? Gas (ovens) Variable $3,067Water Variable $920Repairs & Maintenance Fixed $4,293Rent expense Fixed $19,167Telephone & Internet Fixed $2,300Co?owners? salary Fixed $25,300Brokers? commissions Variable $30,667Total Expenses $697,042Operating Profit $69,625Income Tax $22,280Net operating income $47,345Unit volume 64,500Average Operating Assets $5,500,000Minimum Rate of Return 8.00%Page 3Notes to Selected Financial DataRaw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively highercost items such as flour, sugar, eggs, nuts and fruit that appear on the package label. Flavoradditives are relatively low?dollar cost items and a small part of the weight of the pie such as spices,dyes, salt, and certain oils that don?t always appear on the package label.Bakery labor: The cost amount consists of 22% supervisory salaries and taxes and the rest hourlyworkers. Bakery labor workers are organized into four categories: production line (mixing, filling andbaking), packaging, sanitation and warehouse (all included as part of cost of goods sold).Administration Salaries: Includes taxes and benefits for the Vice President of Operations,the Controller, Human Resources Manager and two administrative support people.Supplies: Includes supplies relating to production, packaging and decorating, sanitation andwarehouse (think: adhesive, pastry bags, spatulas, scrapers, icing pens, gloves and so on).Freight & Shipping?In: The costs of shipping raw ingredients and other materials to the factoryfrom suppliers.Freight & Shipping?Out: The costs of shipping finished products to customer locations anddistribution centers.Utilities Electricity: Approximately 10% for administrative office and the remainder for the factory.The factory portion varies somewhat with production volume.Utilities Gas (ovens): Approximately 5% for administrative office and the remainder for the factory. Thefactory portion varies somewhat with production volume.Water: All for the factory and varies proportionately with production volume.Repairs & Maintenance: All for the factory.Rent expense: The factory uses about 85% of the total square footage of the building andthe remainder is for the administrative office.Telephone & Internet: All for the administrative office.Co?owners? salary: Linda Jackson and Taylor Johnson.Brokers? commissions: Generally 4% of sales.Income Tax: Average total tax rate is 32%.Page 4Practice assignmentLinda and Taylor are asking several firms to provide a proposal recommending what type of costingapproach will help them determine more accurate cost information for Humble Pies? pricing and productdecisions. Your firm has been invited to provide a proposal. In no more than 1,000 words, write anexecutive summary addressing the following questions (charts and tables with numerical values andcalculations will not be included in the word count):1. What information does Humble Pies need? Before recommending a cost system, it is helpfulto understand a company?s information needs. Based on case information, discuss the types ofcost information Humble Pies? product costing system should be able to provide.2. Of the expenses listed in Table 1, determine which should be treated as product costs and whichshould be treated as period costs for management decision making?3. For each product cost you identified, how would you track the cost? For example, would youtrack it by individual job, batch, production step, activity, general factory overhead, etc.?Separate raw materials into main ingredients and flavor additives. Also, separate bakery laborinto four categories: production line (includes mixing, filling and baking), packaging, sanitationand warehouse.4. For each specific cost item you listed in question 3, how would you assign that cost to products toattain reasonably accurate product costs? For example, would you compute standard costs, traceit specifically to a customer order, or assign it using an allocation base (and identify the allocationbase you would use). Again, separate raw materials into main ingredients and flavor additives.Page 5


Paper#40405 | Written in 18-Jul-2015

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