Richard runs a small coffee stand offering standard coffee (with or without milk) during the mornings on campus. The following are the costs per cup of coffee compiled for July. July Number of cups sold 1,000 Cost of disposable cups $1,000 Cost of coffee $200 Cost of milk and sugar $20 Rental of coffee stand $250 Rental of coffee machine $100 Salary of staff $800 Total cost $2,370 Cost of coffee per cup $2.37 Average selling price per cup of coffee $3.00 Profit per cup $0.63 In August, number of cups sold was only 60% that of July. Based on the profit per cup, Richard expects a profit of $378.00 ($0.63 x 600). (a) Using cost behaviour analysis, explain why Richard should not earn $378.00 for August. Compute the correct profit/ loss for August if costs and selling price remained unchanged? (b) Richard is thinking of expanding his coffee business to 10 other university and polytechnic campuses. In order to encourage his workers (who are students from each campus) to increase sales, Richard is considering giving them a sales commission of 5 cents for every cup of coffee sold. As Richard is not able to be physically at all coffee stands in the mornings, he will have to rely on his workers to prepare and sell coffee, collect and record daily takings, and inform him when they need replenishment of coffee, cups and other ingredients. Richard expects to maintain the price per cup of coffee at $3.00 for at least the coming year. (i) Give three (3) examples of management accounting information that will help Richard evaluate and choose the campuses to open his next three outlets. (Be specific and explain how such information would support his decision.) (ii) Using your knowledge of organizational architecture (OA), evaluate if Richard’s proposed commission plan would work? Explain.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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Richard runs a small coffee stand offering standard coffee (with or without milk) during the mornings on campus. The following are the costs per cup of coffee compiled for July. July |
|
|
Number of cups sold |
1,000 |
|
Cost of disposable cups |
$1,000 |
|
Cost of coffee |
$200 |
|
Cost of milk and sugar |
$20 |
|
Rental of coffee stand |
$250 |
|
Rental of coffee machine |
$100 |
|
Salary of staff |
$800 |
|
Total cost |
$2,370 |
|
Cost of coffee per cup |
$2.37 |
|
Average selling price per cup of coffee |
$3.00 |
|
Profit per cup |
$0.63 |
In August, number of cups sold was only 60% that of July. Based on the profit per cup, Richard expects a profit of $378.00 ($0.63 x 600).
(a) Using cost behaviour analysis, explain why Richard should not earn $378.00 for August. Compute the correct
(b) Richard is thinking of expanding his coffee business to 10 other university and polytechnic campuses. In order to encourage his workers (who are students from each campus) to increase sales, Richard is considering giving them a sales commission of 5 cents for every cup of coffee sold. As Richard is not able to be physically at all coffee stands in the mornings, he will have to rely on his workers to prepare and sell coffee, collect and record daily takings, and inform him when they need replenishment of coffee, cups and other ingredients. Richard expects to maintain the price per cup of coffee at $3.00 for at least the coming year.
(i) Give three (3) examples of
(ii) Using your knowledge of organizational architecture (OA), evaluate if Richard’s proposed commission plan would work? Explain.
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