Question

As she sat in her Accounting I class bored while listening to the lecture on journal entries, Annabelle could not imagine being an accountant in the future. As a young girl, she remembered sitting in the kitchen while her mom and aunts baked those delicious Jamaican black cakes. She remembered that the cakes sold very quickly especially at Christmas time and that people were traveling from as far away as Florida to buy them. Her mom learned to bake from her mother, and she wrote down the cake recipes in case Annabelle or one of her siblings decided to follow in her footsteps. However, Annabelle chose to follow in her dad’s path and so she enrolled in college with plans to become an accountant. Her two older sisters where already studying to be a lawyer and a dentist.

Annabelle had an epiphany as she sat in class, she would leave school at the end of the semester to open up a bakery specializing in Jamaican black cakes. Annabelle anticipated that most of her business would be based on special order, customized cakes. She anticipated selling cakes for family weekend gatherings, birthday and wedding celebrations, and holiday gatherings. She wanted to have a few cakes available in a store to appeal to the drop-in customer.

In December 2017 Annabelle followed her plans; she dropped out of college, created a business plan, and incorporated as Annabelle’s Bakery Inc. Annabelle planned to open her business on January 1, 2018. She would use $50,000 inheritance from her mom as startup capital and receive a minimal salary of $500 per month for the first year of business. Uncle David, a marketing executive with a national bank, agreed to provide her with marketing support pro-bono.

Annabelle found the perfect location for her business. A take-out restaurant on the busy intersection of Jamaica and Hillside Avenues in Queens, NY, became available after a bitter divorce between the owners. The landlord was impressed with Annabelle’s vision and agreed to pay for all renovations and charge her $600 per month for rent.

Cost Classification (Task #1)

Her first action plan was to list all the key products or items that she would need to start the business. Annabelle’s list included a conventional oven, a cash register, baking pans, business licenses, health inspections, flour, sugar, baking soda, raisins, butter, eggs and rum. She also planned on hiring her accounting professor on a part-time basis to perform bookkeeping services and her nieces Brianna and Alexis, to help her in the bakery. Aunt Sue Ellen would supervise the girls so that Annabelle could focus on developing the business. Annabelle’s cost drivers are provided in Table 1.

Annabelle needs your help in classifying the various costs. In order to manage these
costs, she wants them identified using the information below. She asked that you use Table 2 for your answers.

Required:
1. Using the Excel template provided, classify Annabelle’s costs using the categories below:

a) Behavior (fixed or variable)

b) Traceability (direct or indirect)

c) Financial reporting (product or period)

o If product cost, identify which items are direct materials, direct labor or manufacturing overhead.

Answer 1

Since -Z has decided to follow her business plans, she definitely need to categorize the cost in initial phase to judge how her business is doing and what steps she should be taking after reviewing let’s say “1 month”.

Startup capital of $50,000 put in will be used to make all the regular payments, few assets. Treatment of this cost in total needs bifurcation which one will be moving to asset side or Expenditure side. If expenditure, what is the nature of cost?

Analyzing her cost involved we can conclude the following:

• Baking Pans, Business Licenses, Health Inspection, Conventional Oven will be treated as Asset item which cannot be categorized as raw material or manufacturing overhead. Since it will be used for few years, it cannot be expensed in 1 period.
• Flour, Sugar, Baking soda, Raisins, Butter, egg and rum are the consumable items which will be used in making the final product for customer.

There is no table 1 in the question but I tried to explain all the cost written in question. Hope it helps

Behaviour
Fixed	Rent paid to landlord (600$ per month), Salary paid to Part time Accountant (Fixed Admin Expenses), Compensation paid to Aunt Sue Ellen(Fixed Expenses), Brianna and Alexis (Fixed Manufacturing overhead), Salary drawn for self
Variable	Flour, Sugar, Baking soda, Raisins, Butter, Eggs and Rum (directly traceable to per unit as well)
Traceability
Direct	Flour, Sugar, Baking soda, Raisins, Butter, Eggs and Rum
Indirect	Rent paid to landlord (600$ per month), Salary paid to Part time Accountant (Fixed Admin Expenses), Compensation paid to Aunt Sue Ellen, Brianna and Alexis (if any), Salary drawn for self
Financial Reporting	Baking Pans, Business Licenses, Health Inspection, Conventional Oven will be shown as Balance Sheet item. It will be reported. Depreciation charged at the end of year will become non-tracable, non-cash and fixed expense for Cost reporting
Product cost
Direct Material	Flour, Sugar, Baking soda, Raisins, Butter, Eggs and Rum
Direct Labor	Brianna and Alexis (Direct Labor if paid variable)
Manufacturing overhead	Rent paid to landlord (600$ per month), , Compensation paid to Brianna and Alexis (fixed portion of salary) since they will help in product preparation