Sweet Bites Cakes (a fictional company) began operations in 2015 and uses natural and organic ingredients and unique
flavor combinations in its product line. Bacon Bourbon Spice Cake, Chai Tea Cake, and Key Lime Avocado Cake are just
a few of the cake flavors that the company sells.
Sweet Bites offers three main product lines:
• Singles, which are single-serving slices of cake that are ready to eat on a plate
• Six-inch cakes, which are pre-sliced and sold to distributors for food service applications or in grocery store
• Ten-inch cakes, which must be sold in refrigerated cases with custom labels. The cakes are available in a variety
pack, in a duo-pack (two different flavors), or as a full cake.
By 2017, the demand for Sweet Bites Cakes grew to a national market thanks to the company’s Instagram and Facebook
accounts. This year, the company landed a large grocery chain contract. In 2017, the company had $6.1 million in sales
revenue and is on track to do $9.3 million in sales this year.
The plant currently has the capacity to do $1 million in sales per month, but with an additional investment of $500,000 in
ovens, mixers, and workstations, Sweet Bites Cakes could increase capacity to $1.5 million. The months of October
through December tend to yield higher sales volume as a result of the holidays. Sweet Bites realizes roughly 60% of its
business during this period.
Sweet Bites employs eight salaried workers and 50 hourly employees. The employee pay rate is from $12.50 to $16.50
per hour for 8 hours per day. Sweet Bites determines its labor costs based on 8 hours per day, the expected number of
workdays per month, and the total projected hours for the month. The hours are multiplied by the total projected hours for
the month to determine the expected monthly gross pay amount for each hourly employee based on a 40-hour workweek.
The sum of the expected hourly employee gross monthly pay is added to the salaried production worker’s gross monthly
pay, and the projected total payroll-added costs such as Social Security, employer taxes, etc., comprise the total labor
dollars for the month. Sweet Bites likes to keep this number as close to 20% of sales as possible and adjusts labor hours
The company bases pricing decisions on cost, consumers, and competition. It wants to achieve a target 17% gross profit
margin (or higher) on cost with pricing being the most important factor. The following table provides selected actual cost
and revenue data for May 2019.
Cost Category Behavior May 2019
Raw Materials Variable $327,934
Bakery Labor Mixed $158,767
Administration Salaries Fixed $ 41,367
Supplies Variable $ 3,833
Freight & Shipping – In Variable $ 4,907
Freight & Shipping – Out Variable $ 64,707
Utilities – Electricity Variable $ 9,813
Utilities – Gas (Ovens) Variable $ 3,067
Utilities – Water Variable $ 920
Repairs & Maintenance Fixed $ 4,293
Rent Expense Fixed $ 19,167
Telephone & Internet Fixed $ 2,300
Co-Owners’ Salary Fixed $ 25,300
Brokers’ Commissions Variable $ 30,667
Total Expenses $697,042
Operating Profit $ 69,625
Income Tax $ 22,280
Net Operating Income $ 47,345
Unit Volume 64,500
Average Operating Assets $5,500,000
Minimum Rate of Return 8.00%
Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher-cost items such as
flour, sugar, eggs, nuts, and fruit that appear on the package label. Flavor additives are relatively low-dollar cost items and
a small part of the weight of the cake such as spices, dyes, salt, and certain oils that don’t always appear on the package
Bakery Labor: The cost amount consists of 22% supervisory salaries and taxes, and the rest are hourly workers. Bakery
labor workers are organized into four categories: production line (mixing, filling, and baking), packaging, sanitation, and
warehouse (all included as part of cost of goods sold).
Administration Salaries: Include taxes and benefits for the Vice President of Operations, Controller, Human Resource
Manager, and two administrative support people.
Supplies: Includes supplies relating to production, packaging and decorating, sanitation, and warehouse.
Freight & Shipping – In: The cost of shipping raw ingredients and other materials to the factory from suppliers.
Freight & Shipping – Out: The costs of shipping finished products to customer locations and distribution centers.
Utilities – Electricity: Approximately 10% for administrative office and the remainder for the factory. The factory portion
varies somewhat with production volume.
Utilities – Gas: Approximately 5% for administrative office and the remainder for the factory. The factory portion varies
somewhat with production volume.
Utilities – Water: All for the factory and varies proportionately with production volume.
Repairs & Maintenance: All for the factory.
Rent expense: The factory uses about 85% of the total square footage of the building, and the remainder is for the
Telephone & Internet: All for the administrative office.
Co-Owners’ Salary: Two owners.
Broker’s Commissions: Generally 4% of sales.
Income Tax: Average total tax rate is 32%.You are a consultant for Sweet Bites Cakes (attached). Prepare and provide a proposal recommending which type of costing approach will help the company
determine more accurate cost information for pricing and product decisions.
Address the following:
What information does Sweet Bites Cakes need? Based on the case information, discuss the types of cost information the company’s product costing
system should be able to provide.
From the table, determine which costs should be treated as product costs and which should be treated as period costs for management decision-making.
For each product cost you identify, how would you track the cost?
For each specific cost item, you listed in Question 3, how would you assign that cost to products to attain reasonably accurate product costs?