Tools used in cost accounting provide businesses the ability to make more informed choices about the things they manufacture and then offer to end users. According to the findings of the research, they analyze the items in order to make lucrative decisions. The management of the Cookie Company wants to know which one of the company’s three goods brings in the most amount of revenue. In addition to that, it uses a variety of techniques to determine which product is the greatest. For example, Contribution Margin (CM), Absorption as well as Variable Costing, Internal Return Rate (IRR), Net Present Value (NPV), Variances, and Cash Budget make it possible for the corporation to monitor the product that performs the best.
Part 1: Contribution Margin (CM), Weighted Average CM and Breakeven
The Cookie Business offers three distinct cookies, including Chocolate chip, Sugar, and Specialty varieties. The Chocolate Chip variety has the highest CM, followed by the Specialty and Sugar varieties; yet, the Specialty variety has the fewest amount of units sold. Because Specialty has the lowest variable costs and the most units sold, it has the highest ratio of contribution margin per unit at 3.23, while Chocolate Chip has a ratio of 0.79 and Sugar has a ratio of 0.69. It has been determined that the weighted average contribution margin is 1.018, which indicates that sales are 1.018 times the amount of fixed costs. When considering a sales mix of this kind, the weighted average breakeven is the method of choice for determining the absolute least number of units that must be moved. The company has to sell a total of 122,783 units before it can be profitable, and every unit after that will bring in a profit for the business (Wuni, & Shen, 2020).
Less: Variable Costs
Less: Common Fixed Costs
Per item Contribution Margin
Weighted Average Contribution Margin
Break-even point in units
Part 2: Value of Ending Inventory under Different Costing Methods
Both the fixed and variable Cookie business absorption rates are $2.05 per thousand. It’s a sign that fixed expenses are lower than those for generating revenue. Both absorption and variable costs result in the same net operating income. Unsold items are counted as closing inventory, and the numbers will never be the same because of price fluctuations. One of the researches raises concerns about the use of marginal and absorption costing comparisons in managerial decision making. Management of cookie shops is urged to switch to variable costing from absorption costing.
Variable manufacturing overhead
Total variable manufacturing costs per unit
Fixed manufacturing overhead per year
In addition, the company has fixed selling and administrative costs:
Fixed selling costs per year
Fixed administrative costs per year
Selling price per cookie
Number of cookies produced
Number of cookies sold
Fu l (absorption) costing:
Full cost per unit
Ending Inventory Full (absorption) costing
Variable cost per unit
Ending Inventory Full (absorption) costing
Part 3: Increase/Decrease in Profit because of Special Order
Profitability has taken a hit as a result of the sluggish business and the need to offer cookies at a discount. Meanwhile, the business has landed a special wedding order that’s expected to bring around $3,150. There will be a $600 up-charge for cookies with special designs. Profit for the business is $2750 if cookies are offered at a $2.75 discount. In light of present market conditions, accepting the wedding customization request would result in a $400 rise to the company’s bottom line. Until the company can no longer make a profit by offering the cookie for $3.75, it must continue to accept such orders.
Number of cookies needed
Discounted price per cookie
Normal price per cookie
Cost of special printed design per cookie
Cost of tool needed to make the design
Revenue for special order
Costs for special order:
Net increase (decrease) in profit
Part 4: Internal Rate of Return for the New Equipment Purchase
The annuity factor present value of a $241,669 cookie company is quite close to the initial investment amount. With an internal rate of return of 8.03 percent, a project fails to meet the required profitability threshold for the discount rate. Management should not make decisions based only on NPV and IRR because of how unreliable they are, according to research. With a negative NPV of $8330, it’s obvious that management should turn down the idea.
As the owner of the Cookie Business, you are considering the following investment:
Purchase of new equipment
Expected annual increase in sales
Acceptable rate needed
Calculate the Internal Rate of Return:
PV of annuity factor
Internal rate of return
Accept or reject
One of the partners’ brothers owns the store where the necessary equipment for the new venture will be acquired. The corporation is being coerced into buying his machinery because of his insistence. When a relationship compels one to make a choice, moral questions naturally emerge. If honest deals, adequate paperwork, and other legal requirements are ignored, integrity suffers. Because of this, it’s clear that there is no integrity or honesty involved in these business dealings. IRR and NPV both indicate that the equipment will not increase the company’s profits. The owner is not behaving professionally if he pressures the company’s management into purchasing the equipment. There would be no ethical issues with the deal if either management or the board had shown reluctance to purchase the equipment (Sargiacomo, & Walker, 2020).
Part 5: Cash Receipts
Sales revenue is used to predict costs in order to create a budget (credit and cash). Unlike credit sales, which are documented upon receipt of payment in the trade receivables, cash sales are reported upon receipt of payment. Eighty percent of a cookie shop’s revenue comes from same-month cash purchases, while twenty percent comes from credit sales paid for the following month. In January, the business will break even, in February it will generate a profit of $115,000, and in March it will lose $18,000 if it has to fund its monthly costs of $150,000. The cookie company has to figure out why sales have dropped below breakeven units so that they can develop a plan to boost sales in the next month. Because of the unpredictable nature of sales, management must gather information from December through March (Mosteanu, & Faccia, 2020).
The budgeted credit sales are as follows:
December last year
Month of the sale
Month following the sale
Last month’s sales
Current month’s sales
Part 6: Material and Labor Variances
Management often uses variances because they are a useful tool for revealing discrepancies between actual and planned spending. We see a positive variation in direct material quantity and a negative variance in direct material costs. This means that materials are being used effectively, but at a pace that exceeds what was anticipated in the budget. Both low utilization and high rate differences in labor are undesirable. As a result, the corporation is paying the workers more than was originally planned. Management should care about how effectively their employees use their resources, which they may do by giving them the right kind of instruction. They’ll have to plan ahead for the material purchases, and they have the option to hunt for alternative vendors that provide the same thing at a lower price.
Actual Cost of Direct Materials
Standard Cost of Direct Materials
Actual Materials Used
Standard Materials Used
Actual Direct Labor Rate
Standard Labor Rate
Actual Hours Worked
Standard Hours Worked
Calculate Materials Variances:
Materials Price Variance
Materials Quantity Variance
Calculate Labor Variances:
Labor Rate Variance
Labor Efficiency Variance
Conclusions and Recommendations
Cookie’s goods are successful enough to justify the company’s existence. Sales mix contribution is more than double the fixed expenses, as shown by the weighted average contribution margin being more than 1.0. Variable costing is more realistic and should be used by management. Since business is sluggish, the firm stands to gain financially by taking the wedding order. In the absence of considering inflation and taxes, IRR and NPV alone might mislead the company. The cookie company has planned its sales budget to meet its monthly costs of $150,000, but since March will result in a loss of $18,000, management must determine the cause of the unexpected drop in revenue. If there is a negative variation in the cost of materials, the company can look for a new supplier, while management can improve productivity by providing staff with more training on how to operate more efficiently. Costing tools are meant for for use by the company’s upper management; financial accountants and anyone outside the company should not have access to the data they generate.