Hello, I need some help with accounting Sue\'s Sauces 0 You are a consultant wor

Question

Hello, I need some help with accounting Sue's Sauces 0 You are a consultant working for EPMG located in Vancouver, BC. Today you are meeting with new clients Sue and Ron Smith. Both Jane and Ron are entrepreneurs with Sue owning Sue's Pasta Sauces SPS). Sue describes her business and the required advice. Sue I am Italian and my grandmother lived with us. My grandmother loved to make pasta sauces using recipes that she brought over from Italy. Several years ago I started to make the pasta sauces as well for friends and family. At one point I realized that this could be a commercial business and so when the opportunity presented itself I opened my own store, Sue's Pasta Sauces. I make and sell a variety of sauces for both individuals and also for restaurants. I make the sauce and seal it in jars and because it has a reasonably long shelf life I am able to make it in batches weeks ahead of time. Sue flavours include Bolognese with Bacon, Bolognese with Red Wine, Bolognese with Mushrooms, Roasted Garlic & Onion as well as others. The variety and number of different available sauces have earned Sue's Pasta Sauces a great reputation for high quality sauces and therefore the sales have increased tremendously each year Although pasta sauces can be made in a variety of ways, Sue used the same basic technique for all the different sauces. Essentially Sue creates a basic tomato sauce base and then adds additional ingredients to create the different flavours. Custom flavours are something that Sue might do in the future but not yet. The sauce is sold in 500 gram and 1 kilogram jars which sell for $7.00 and $12.00 each respectively regardless of flavour Previously Sue worked for large chemical manufacturer who instilled in her the importance of having detailed cost information to make decisions about both the pricing and profitability of the variety of different products that they produced. Sue has been using a job order costing system in her business for costing the various flavours of sauce, keeping detailed records for each batch of sauce. For each batclh Sue collects information on the ingredients used. The basic ingredients and process is exactly the same for each flavour of sauce except near the end of the process when different ingredients are added to create the flavouring. Sue believes that this information allows her to understand the different costs of each batch of sauce even though the cost information is not used in determining the selling price as each flavour of sauce is sold at the same price. This information allows Sue to know which flavours are more costly and in the future maybe could be used to determine which flavours to drop from the product line

Explanation / Answer

a: cost computation:

Bolognese with bacon: Cost of 10 kg batch = cost of tomato paste+ground meat+onions+bacon

= 6780*(20/22600)+ 1130*(20/2260) + 170*(25/2260) + 283*(25/4520)

= 19.4458.

This is the cost of 10kg. Thus cost of 1 kg = 19.4458/10 = $1.9946 per kg

Bolognese with red wine: Cost of 10 kg batch = cost of tomato paste+ground meat+onions+red wine

= 6780*(20/22600)+ 1130*(20/2260) + 170*(25/2260) + 509*(23/3390)

= 21.3339

Thus cost of 1 kg = 21.3339/10 = $2.1334 per kg

Bolognese with mushrooms: Cost of 10 kg batch = cost of tomato paste+ground meat+onions+mushrooms

= 6780*(20/22600)+ 1130*(20/2260) + 170*(25/2260) + 848*(17.5/9040)

= $18.9743

Thus cost of 1 kg = $18.9743/10 = $1.8974

Roasted garlic: Cost of 10 kg batch = cost of tomato paste+ground meat+onions+roasted garlic

= 6780*(20/22600)+ 1130*(20/2260) + 170*(25/2260) +565*(20/10170)

= $18.9916

Thus cost of 1 kg = 18.9916/10 = $1.8992

Cost data per kg for different sauce is summarized below:

b: Margin  computation:

Margin = selling price - costs.

Margin % = margin amount/sales*100

Selling price for 1 kg jars = $12. Thus margins for 1 kg jars are given below:

Margins for 500 gram jars:

Here costs will be 1/2 of the 1kg jars and selling price = $7

Sauce Cost per kg Bolognese with bacon 1.9446 Bolognese with red wine 2.1334 Bolognese with mushrooms 1.8974 Roasted garlic 1.8992

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