Chapter 3, Problem 3.62ACT

Issues with cost of job (Learning Objectives 2, 3, & 4)

Custom Cookies produces gourmet cookies with company logos for special promotions. The cookies are customized with the customer’s choice of shape, color, flavor, and decorations. Custom Cookies uses a job cost system and allocates manufacturing overhead based on direct labor cost. At the beginning of the most recent year, Custom Cookies calculated the cost per batch of dozen cookies as:

Direct materials (flour, sugar, butter, eggs, baking soda, vanilla)	$1.50
Direct labor (shape and decorate cookies)	0.50
Manufacturing overhead	0.90
Total manufacturing cost per dozen cookies	$2.90

In September, Chesrown Motor Group ordered 400 dozen cookies to present to its clients as holiday gifts. Delivery of the cookies to Chesrown would occur in early December. At the time of Chesrown Motor Group’s order, the selling price per dozen cookies was $7.25.

Chesrown Motor Group placed an order for an additional 100 dozen cookies in November, to be delivered with the original order of 400 dozen. However, since that original order, two events occurred that increased the cost of the cookies. First, the price of sugar skyrocketed due to bad weather in Brazil and India, two of the largest sugar suppliers in the world. Second, a new local cookie bakery is about to open in time for the holiday season and is aggressively trying to hire the cookie decorators from Custom Cookies. In response, Custom Cookies increased the hourly rate of the employees who decorate the cookies to keep those workers from going to work for the competition. All other costs at Custom Cookies have remained the same.

Because of these two events, Custom Cookies recalculated the cost of a dozen cookies as follows:

Direct materials (flour, sugar, butter, eggs, baking soda, vanilla)	$1.60
Direct labor (shape and decorate cookies)	0.65
Manufacturing overhead	1.17
Total manufacturing cost per dozen cookies	$3.42

Requirements

1. A. Do you agree with the cost analysis for the second order? Explain your answer.
2. B. Should the two orders be accounted for as one job or as two jobs in Custom Cookies’ system?
3. C. What sales price per box should Custom Cookies set for the second order? Explain why you have selected this per-box price. What are the advantages and disadvantages of this price?