Royal biscuits inc has a very select but highly respected product portfolio. They produce 3 different kinds of fine biscuits.
-supreme crisp: A light wafer cookie with dark chocolate crème filling
-tropical chocolate : A heart-shaped cookie enrobed in smooth Belgian chocolate, with a touch of orange flavor.
– sublime roll : A thin crepe rolled into an elegant flute, drizzled with a hint of dark chocolate.
All biscuits have the same main ingredients ( chocolate, butter, sugar and flower) complement with biscuit specific ingredients. Royal Biscuits Inc. only works with top quality suppliers who charge $8 per kg of chocolate, $ 4 per kg of butter, 1 $ per kg of sugar and $0,35 per kg of flower. All other ingredients are purchased at an average price of $ 1,5 per kg . To produce 1 kg of supreme crisps, Royal Biscuits Inc. needs to purchase 200g of chocolate, 150g of butter, 250g of sugar, 250g of flower and 150g of other ingredients such as vanilla powder, eggs, … for 1 kg of Tropical chocolates, they need 200 g of chocolate, 250g of butter, 150g of sugar, 250g of flower and 150g of other ingredients. The third product, the sublime rolls, are made of 50g chocolate, 250g butter, 200g sugar, 250g flower and 250g other ingredients.
Royal biscuits Inc. employs 4 full time production workers in its production hall, working in 2 shifts. A production worker works 1750 hours every year at practical capacity and at a cost of $ 25 per hour. In case of temporary technical unemployment, the production workers receive an unemployment benefit from the government and Royal Biscuits Inc. does not have pay any supplementary compensations. To produce 1 kg of supreme crisps , Tropical chocolates and Sublime rolls, respectively 0,09; 0,08 and 0,12 labor hours are required. In addition, the company has 1 person(FTE) in charge of maintenance. He also works an average of 1750 hours a year but earns only $19 per hour. A few years ago, Royal Biscuits Inc has invested in 3 new production process of Supreme crisps takes 0,16 machine hours per kg, the process of Tropical chocolates takes 0,12 machine hours per kg and producing the Sublime rolls takes 0,13 machine hours per kg.
Annual depreciation of the machines is $134000. The cost of power and other supplies to run the machines is $ 3 per machine hour for the Supreme crisp production line, $2 per machine hour for the Tropical chocolate production line and $2,5 per machine hour for the Sublime roll production line. As such, the cost of power and supplies is considered to be a direct cost.
William Kensington calculated that there were $16300 general administration costs linked to the production, and that Royal Biscuits Inc pays a total amount of $30000 rent for the administration building and the production hall. Management receives $48760 for running the business.
Distribution costs and selling costs, both non related to production, amount respectively $18450 and $7800 per year.
Royal Biscuits Inc has a total shareholders’ capital of $12500000 and outstanding debt of $1100000 at 7% the current tax rate is 39%
Allocation of costs
Knowing these costs, William Kensington had to make a decision about how to allocate the overhead costs. The allocation needed to be both logical and uncomplicated. After a long discussion with Jim Martin, they decided it would be best to allocate the maintenance and depreciation costs based on the machine hours. All other indirect costs linked with production would be allocated based on direct labor hours.
1- Calculate the standard cost of 1 kg of Supreme crisps, Tropical chocolates and Sublime rolls, with the full costing method, using practical capacity as a denominator. This will allow William Kensington to review its selling prices.
2- At the end of the year, it becomes clear that the purchase price of chocolate increased to $8,65 per kg. A marketing study performed by an outstanding marketing office revealed that in order to increase sales, the flavor of the Supreme crisps should be adapted. Therefore, the recipe of Supreme crisps was changed. Royal Biscuits Inc. needed to purchase 150g of chocolate and 200g of butter to produce 1kg of the new Supreme crisps. In addition the production workers hourly cost increased from $25 to $26,5. Calculate the actual costs per Kg of the 3 products, using the full costing method. The actual sales volume consists of 22,500Kg of Supreme crisps, 16,300kg of Tropical chocolates and 20.880Kg of Sublime rolls.
3- Compare actual and standards. Calculate and analyze the following variances:
a- Direct materials variance, direct labor variance and manufacturing overhead variance.
b- Supreme crisp variance, Tropical chocolates variance and Sublime roll variance( these variances only include the direct costs)
4- Royal Biscuits Inc. sells it Supreme crisps at $13,2/kg, its Tropical chocolates at $14,8/Kg and its Sublime rolls at $11,5/kg. Given the actual sales volume, how will the income statement look like using.
a- Standard full costing at practical capacity ?
b- Actual costing ?