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22-09-2018

Product Code:- Accounting-PH97

HEAVENLY CREATIONS, INC.

A MANAGEMENT ACCOUNTING PROJECT

Revised 8/201

INTRODUCTION

The objective of this project is to provide students with a practical application of some of the key concepts discussed in the managerial accounting course.

LEARNING OUTCOMES

Students should be able to:

1. Identify the various costs that are part of a business environment and the three elements of product costs.
2. Differentiate between the different costing systems.
3. Illustrate business transactions using T-account analysis.
4. Prepare a trial balance using T-Account balances.
5. Prepare the statement of cost of goods manufactured and an income statement.
6. Calculate the break-even point in units and dollars, and target sales in units and dollars.

HEAVENLY CREATIONS, INC.

As she sat in her Accounting I class bored while listening to the lecture on journal entries, Heaven Jones 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 Heaven or one of her siblings decided to follow in her footsteps. However, Heaven 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.

Heaven 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. Heaven 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 gathering. She wanted to have a few cakes available in a store to appeal to the drop in customer.

In December 201X Heaven followed her plans: she dropped out of college, created a business plan, and incorporated as Heavenly Creations.  The bakery is in honor of her mom, Cleo, who passed away earlier in the year.  Heaven planned to open her business on January 2, 2016.  She would use the \$50,000 inheritance from her mom as start-up capital and receive a minimum 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

Heaven 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 Heaven’s vision and agreed to pay for all renovations and charge her \$600 per month for rent.  Heaven will be able to use baking pans and other kitchen utensils left by the previous tenant.

Cost Classification (Assignment #1)

Her first action plan was to list all the key products or items that she would need to start the business. Heaven’s list included a conventional oven, a cash register, 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 Heaven could focus on developing the business. Heavenly Creations’ cost drivers are provided in Table 1.

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

1. Behavior (fixed or variable)
2. Traceability (direct or indirect)
3. Financial reporting (product or period)
4. If product cost, identify which items are direct materials, direct labor or manufacturing overhead.

Costing Systems (Assignment #2)

Heaven discussed the business plan with her accounting professor who agreed to serve as her part time accountant. His first advice was for the business to develop a budget. Since Heaven did not complete Accounting II, she was not aware of the various costing systems that exist in businesses. Her accounting professor told Heaven of the three different types of costing systems that exist in organizations – job order, process costing and activity based costing.

Required: Which type of costing system is Heavenly Creations most likely to use? Discuss?

Heaven spent the month of December talking to various suppliers in order to determine her cost structure. She added cost data to the information in Table 1.

Heavenly Creations, Inc. opened for business on January 1, 201X as planned and Heaven placed an initial deposit of \$10,000 of cash into the business.  First, Heaven made a purchase to stock her inventory.  Heaven purchased \$2,279 of direct ingredients and \$150 of indirect ingredients on account for the cakes.  During the month of January, the business used 200 pounds of flour, 200 pounds of sugar, 67 dozen eggs and had 4 bad eggs to dispose of during the month.  20 baking soda boxes, 200 pounds of butter, 100 pounds of raisins, 50 bottles of rum, and the other ingredients (one box of each for a total of four).

Manufacturing overhead is applied to production at 4 dollars per cake.  Heaven paid cash for the purchase of the oven and all the salaries.  Her nieces worked 300 hours in total for the month.  January was a very good month for the bakery since it baked 200 cakes and sold all for cash.  The average selling price was \$50 per cake.  All manufacturing overhead is closed out at month-end.  The supplier was paid in full at month-end.  Heaven’s Raw Material physical periodic inventory count resulted in an Inventory level valued at zero at month-end.

Required: Use Table 3 to record and post theHeavenly Creations, Inc. January transactions using the General Journal and the provided T-accounts (round allcalculations to 2 decimal places) All other costs such as utilities, must be accounted for in the T-accounts provided (assume such transactions where applicable, are paid in cash).

Table 4 shows the Chart of Accounts for Heavenly Creations, Inc.

Reporting (Assignment #4 & #5)

Since Heaven was not paying much attention to the discussion on journal entries in her one accounting class, she does not understand the T-accounts that you provided. However, she heard through her accountant that there is a manufacturing report that would provide her with the same information as the T-accounts and is more user-friendly. She believes that the report is called the Statement of Cost of Goods Manufactured.

Required: Prepare: the Trial Balance; the Statement of Cost of Goods Manufactured and anIncome Statement for the month of January.

Breakeven Analysis/Target Sales (Assignment #6)

Although business was off to a good start in January, Heaven realized that she will need to be profitable in order to continue as a viable business. Heaven discussed the subject of profitability with her accountant who suggested that she first needs to determine her breakeven point in both unit sales and dollars. He explained to her that breakeven is the point where all costs are covered by sales and so, profit is equal to zero. He also suggested that the company should establish the monthly target profitability in order to determine the amount of cakes it would need to sell to achieve this level.

Since Heaven did not know how to perform this calculation and in order to save money, she asked you to calculate the company’s breakeven point and the target sales need to achieve a monthly profit of \$500.

Required: Calculate Heavenly Creations, Inc.’s breakeven point in both units and sales dollars. Also,calculate the sales needed in order to achieve a monthly profit of \$500.Note: Use four decimal places in converting from total to per unit cost.

TABLE 1: COST INFORMATION

 Item and Ingredients Cost Standard per Cake Conventional oven \$6,000 (depreciated over 5 n/a years on a Straight-Line basis No salvage value) Refrigerator \$0 (provided by the landlord) Baking pans, licenses \$0 (paid for by dad) n/a Baking flour \$24 per 8 pounds bag 1 pound Eggs \$2 per dozen 4 eggs Sugar \$15 per 25 pounds bag 1 pound Baking soda \$6 per 14 pounds box Butter \$6.50 per 4 pounds 1 pound Raisins \$8 per 2 pounds ½ pound Others (currants, diced date, nutmeg, molasses) \$30 for all 4 boxes per month Cash Register \$12 per month (rental for 2 years) Rum (alcohol) \$12 per bottle ¼ quarter of bottle Utilities (includes gas, electric \$50 per month and water) Mobile phone (business) \$50 per month Salary- Heaven \$500 per month Salary – nieces \$8 per hour 1 person 1.5 hours per cake Salary-aunt \$100 per month Cake Accountant \$100 per month Rent \$600 per month Estimated MOH \$4.00 per cake

 TABLE 2:  COST CLASSIFICATION CHART BEHAVIOR TRACEABILITY REPORTING PRODUCT CLASSIFICATION REPORTING Fixed Variable Direct Indirect Product DM DL MOH Period Oven Cash Register Rent Utilities Cell Phone Flour Sugar Baking Soda Butter Raisins Eggs Rum Other Materials Accountant Fee Brianna Salary Alexis Salary Heaven’s Salary Aunt Ellen’s Salary

 Table 3: Heavenly Creations Entries January Journal Entries for the Month 2 Heaven invested \$10,000 in cash into Heavenly Creations 2 Heaven bought indirect ingredients for the cakes in the amount of \$2,279 and indirect ingredients in the amount of \$150 on account 2 Heaven signed an agreement for a cell phone on account 3 Heaven signed a rental agreement on account for a cash register 3 Heaven purchased a new oven and paid cash 3 Heaven paid her vendors for the cake ingredients bought on account 5 Heaven started using the direct materials to make cakes 28 Recognized payable for Brianna and Alexis direct wages 28 Recognized payable for Heaven's first month of salary 28 Recognized Aunt Ellen wages for supervising nieces 28 Recognized Professor's fee for accounting work 28 Apply Manufacturing Overhead to Production 29 Paid payables for cash register and phone 29 Recorded completion of cakes that are available for sale 29 Recorded Cash Sale of Cakes 29 Record Payment of Indirect Product Cost - Utilities and Rent 30 Paid Labor for Month 31 Recorded Depreciation of Oven 31 Recorded MOH Allocation Adjustment 31 Recorded Raw Material Inventory Adjustment

 Table 4: Chart of Accounts Assets Liabilities Cash Accounts Payable Raw Material Inventory Salaries Payable Work In Process Inventory Finished Goods Inventory Equity Equipment - Oven Capital, Heaven Jones Accum. Depreciation Revenue Sales Cost Manufacturing Overhead Cost of Goods Sold Expense S&A Expenses

As she sat in her Accounting I class bored while listening to the lecture on journal entries, Heaven Jones 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 Heaven or one of her siblings decided to follow in her footsteps.

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