Question

Because friends and neighbors frequently praise her baking skills, Becky plans to start a new business baking cakes for customers. She wonders how to determine the cost of her cakes. Assume financial statement data are prepared in accordance with GAAP.

1. Identify the three components of product cost incurred in producing cakes and give examples of each. Also classify the costs as fixed, variable, or mixed. Explain any assumptions you use in determining your costs and classifying them.

2. Explain why measuring product cost for a bakery (or other manufacturing company) is more complex than measuring product cost for a retail store.

Answer 1

1.

The three components of product cost incurred in producing cakes are direct material,direct labour and manufacturing overhead cost. examples

for direct material:sugar,cream,flour etc (materials which costs can be traceable)

for dircet labour:cost of cake maker etc (labour charge which is directly attributable)

manufacturing overhead :electricity bill,depreciation of equipment etc (costs which cannot be traceable directly)

direct material and direct labour costs are variable cost while manufacturing overhead costs are of mixed it contains both variable and fixed .direct materials and direct labour costs changes with the changes in the number of units in cakes ,in manufacturing overhead costs electricity used to operate equipments of cake making is a variable product (electricity cost increases as number of cakes increases) it may be also a semi variable too.for example electricity costs may be $100 upto 250 cakes and after that $1.5 per cake.the rent and fixed manufacturing overhead costs include repairs,depreciation on equipment,indirect labour and material costs etc..

assumptions:

labour costs are based on a hourly rated basis

manufacturing overhead costs are a mix of both variable and fixed costs

2.

measuring product cost for a bakery or other manufacturing compani is more complex than measuring product cost for a retail store,it is beacuse that for a retail store keeper he can easily calculate its product cost by purchase price plus transportation fees plus and other administration expense.and then he add his profit and reaches to the selling price , but on the otherside for a bakery factory or any other manufacturing company the cost is determined by calculating material costs,labour costs,overhead costs ,indirect and direct expenses we have to find out all these costs and some times we have to avoid some overhead costs which is not related to production costs.thats why it is saud that measuring product cost for a bakery or other manufacturing compani is more complex than measuring product cost for a retail store.