Introduction
Spence Coffee and Bites is the name of the firm, and in five years, we hope to develop a distinctive global identity via our chain of cafés. Freshly baked snacks and high-quality coffee are quickly and courteously delivered at the client’s request. The company’s long-term goal is to retain its distinctive coffee mix, which guarantees that every cup will make the consumer feel calmer and happier. Our expresso is distinguished by a distinct and flavorful Classico blend that was painstakingly created from a variety of beans from various coffee-growing regions across the world.
Purpose
The report’s goal is to explain the costing methods used by the organization and its current financial performance. The management may better manage expenses and increase the operational effectiveness of the company by measuring and analyzing variations. Along with the balance sheet and cash flow statements, the company’s income statements also show owners and investors how the business performed financially during the previous month. The income statement is crucial for displaying the company’s profitability over time as well as patterns in its profits and spending (Palepu et al., 2021).
Methods and Approach
Spence Coffee and Bites’ financial statements are prepared using a variety of accounting techniques. Additionally, overhead costs have been estimated and assigned to assist in determining the total cost associated with producing the items. Identification and analysis of the real expenses associated with the company’s inventory and goods often pertain to inventory valuation. In order to calculate the costs of delivering Spence Coffee and Bites’ goods and services, product costing is essential. Calculating and assigning overhead costs and the direct fees related to the cost of products sold are often part of the process. When it comes to giving an analysis of the choices that must be made in relation to capital expenditures, the capital budgeting approach is crucial. Using this strategy, it is possible to predict how profitable the company will be during the course of an investment. There are estimations of the net present value (NPV) and the company’s internal rate of return to assist new capital budgeting choices (IRR). The approach ignores the company’s profitability and just concentrates on cash flows. Instead of focusing on costs and revenues, capital budgeting focuses on cash inflows and outflows. Another essential method for determining the company’s financial stability is marginal analysis. The marginal study analyzes the advantages that result from generating an additional unit in comparison to the expense of creating the same team (Samuelson et al., 2021). When making decisions that are intended to maximize the profitability of a particular organization, marginal analysis is essential. For instance, Spence Coffee and Bites’ marginal analysis will be crucial when deciding how to expand the company’s operations. It may be essential for the business to produce more items or create new product lines in order to achieve its worldwide presence and competition. Investors and other stakeholders can determine when Spence Coffee and Bites can reach economies of scale and optimize production and overall operations using marginal analysis.
Financial Strategy
Costing System
Job order costing is used by Spence Coffee and Bites to calculate the price of manufacturing a single product. The system, which is made up of procedures, checks, forms, and reports, is designed to compile and provide management and other parties with information on the firm’s earnings.
Job order costing is used by Spence Coffee and Bites to calculate the price of manufacturing a single product. This technique of costing is frequently used by businesses that produce goods in lots. Because it is the best approach for our kind of business, Spence Coffee and Bites employs a task order costing system. Our business has distinctive consumers who individually order things that are special. The job costing system helps the company to provide accurate estimates of the costs associated with producing the Spence coffee and nibbles, including labor, materials, overhead, and other costs. The algorithm can determine particular product prices and ensure that they are reasonable for our consumers while yet generating a profit for the company. However, when similar items are produced using a standardized process, and the direct labor, direct material, and manufacturing overhead cannot be clearly linked to a specific unit, process costing is advised.
Selling Prices
The company uses cost-volume-profit (CVP) analysis to ascertain how variations in volume and expenses impact the operating profit of the company. The number of units that must be sold or the amount of sales income needed by the company to cover the costs of making the coffee drinks and snacks will be the breakeven threshold for Spence Coffee and Bites.
Contribution Margin
The company’s contribution margin is displayed above. Investors and other stakeholders can choose how much of the sales of Spence Coffee and Bites products are available to pay fixed expenses and contribute to the company’s earnings through contribution margin.
Target Profits
The business’s projected profits are shown above. The predicted earnings from the business that guarantee the firm’s profits can cover production costs are included in the target profits for the company. The number of sales needed to cover costs, or the breakeven sales volume (BEP), must be known by the company in order to achieve the desired profitability (Egan, 2022).
Financial Statements
Statement of Cost of Goods Sold
Given that the cost of items supplied is relatively low, the company must be spending less on producing its goods, which results in higher profits for Spence Coffee and Bites. The direct costs incurred by Spence Coffee and Bites to create its goods are reflected in the cost of items sold. In addition to other costs that might be directly related to the development of the products, the price of coffee and bites for the business will include the cost of procuring the raw materials and labor. All indirect costs, such as rent and utilities, are disregarded when determining the cost of items sold. The value of inventory at the start of the accounting period, any raw material purchases made throughout the month, and the inventory’s value at the conclusion of the month are all included in the cost of goods sold for the firm (CFI Team, 2022).
Income Statement
The sales and operational expenses for Spence Coffee and Bites are summarized in the income statement for the entire month. The business currently has no non-operating income.
The above calculations reveal the company income statement.
Variances
The working shows an illustration of the variances for direct labor time and materials price. Direct material price variance = (Actual price per unit of materials– standard price per unit of materials) * Actual quantity of materials purchased. The direct material price compares the actual cost per unit of the direct material to the standard price per unit of direct materials. The direct labor variance reveals that the organization is not spending more than anticipated.
Significance of Variances
Variances are critical in budgeting and forecasting the profitability of the business. Variance analysis has different advantages for the firm. Correlations are a critical element in business planning; determining a correlation between two different products will be crucial for the business.
Variance analysis is essential to forecasting. Forecasting employs patterns of past data to generate a theory about the company’s future performance.
References
CFI Team. (2022). Cost of goods sold (COGS). Corporate Finance Institute. Web.
Egan, B. (2022). Chapter 15 – cost-volume profit (CVP) analysis and break-even point. Introduction to Food Production and Service. Web.
Jiambalvo, J. (2020). Managerial accounting. Wiley. Paff, L. (2021). 10.9 management’s use of variance analysis. Financial and Managerial Accounting. Web.
Palepu, K. G., Healy, P. M., Bernard, V. L., Wright, S., Bradbury,
M., & Coulton, J. (2021). Business Analysis & Valuation: Using Financial statements. Cengage Learning Australia.
Samuelson, W., Marks, S. G., & Zagorsky, J. L. (2021). Managerial economics. Wiley.