???The cost management system is a collection of tools and techniques that identify how management??™s affect costs ( Horgren, C. Sundem, G., Stratton, W., Burgstahler, D., & Schatzberg, J. 2008, p. 136. Aunt Connie??™s cookie company has been in business for 24 years. The company was created by Connie Rocho, and has always been a family- owned business. The company??™s Chief Executive officer is Maria Villanueva, Connie??™s niece. She has hired a new Chief Operating Officer (COO) to make decisions to maximize the company??™s contribution margin and operating profits. She has given the COO total control of these operations. It would be beneficial to use cost accounting system to determine it product costs.
The Aunt Connie??™s trademark has acquired success producing lemon creme and real mint cookies. The decisions to be made for the cookies include bulk order, competitor buyout, new product production, and capacity issues. Price increases for the cookies have decreased volume sales and revenue. The sales mix presently used my need adjusting to maximize production and meet demand. The first analysis to consider is the contribution margin data.
In its ???Contribution margin??? section (2003), In Wall Street Words states that the contribution margin is the sales minus the variable cost of producing the product. In the simulation the company is faced with the decision to cut prices to increase the sales volume. After calculating the comparison of the cookies the COO found that the contribution margin for the cookies was high enough to allow a price reduction.
The owner wants to increase marketing expenditures in addition to cutting prices to boost sales. This would be an investment in the products to reach more potential customers. By increasing market expenditures the company will build long- term equity for the cookies.
Connie cookies have been offered a special bulk order of 1,000,000 packs of cookies. The company would have to reduce the volume of another product to meet the demands of this order. The COO must determine if this order will be beneficial. In order to accommodate the bulk order the company the bulk order the company must reduce the volume of the lemon creme cookie or the real mint cookies to deal with a capacity issue. Because the lemon creme has a greater contribution margin the company will reduce the real mint cookies. The general rule of thumb suggests that it is better to produce the product that provides a greater contribution margin ( Horgren, et al., 2008). It is crucial to consider all the different alternatives to see how all situations affect operating profits.
Aunt Connie??™s cookies are confronted by a competitor to purchase their manufacturing unit. The company is going out of business because of their poor production manufacturing processes. The COO must decide if they will buy the company, and if they buy what cookie will they produce. Auntie Connie must assess the all alternatives on using a comparison table.
Based on the data on the table the production of peanut butter cookies would result in losses. The lemon cremes have the greatest contribution margin and high demand so the company should buy the unit to keep up with the demand. According to the table the company should breakeven around 563,000 units, which is less than the needed amount of 600,000 resulting in profits for the new unit.
The baker has come up with a new chocolate cookie to be used during the Christmas season. To produce this product the company is considering a purchase of new equipment that will aid in the production of this labor intense product. Present labor can produce 1,000,000 cookies a month, the new equipment will produce 4,00,000 units a month. The COO must compute the indifference point, which is ???the volume at which costs for both labor and equipment are equal??? (University of Phoenix, 2010, para. 10). In this case labor and equipment are equal at 1,000,000 units. The forecast is for 1,800,000 units is higher than the indifference point. The company will take a loss if they purchase the equipment because the fixed cost will have to be paid even if they don??™t produce the 4,000,000. Until the demand is closer to the capacity of the equipment the higher labor would be the best route.
It is essential that Aunt Connie??™s cookies use cost accounting systems to determine its product costs. The company can accomplish this by using the contribution margin approach by using graphs, comparison tables, the breakeven analysis, and the point of indifference. All these factors are essential for continued success.
contribution margin. (2003). In Wall Street Words. Retrieved from
Horgren, C., Sundem, G., Stratton, W., Burgstahler, D., & Schatzberg, J.(2008). Introduction to
Management Accounting. [University of Phoenix Edition e-text]. New Jersey: Pearson-
Prentice Hall. Retrieved from University of Phoenix, ACC561–Interdisciplinary
Capstone course website.
University of Phoenix. (2010). Contribution Margin and Breakeven Analysis[Computer
Software]. Retrieved from University of Phoenix, Simulation, ACC561-Accounting