Toni had worked as an apprentice baker in a large bakery that supplied different types of bread - from the standard white loaf to the speciality bread such as rye, gluten-free and organic. At the end of her training, she decided to start a small business specialising in producing cakes - in particular, cakes with ornate decorations made from icing sugar - and Danish pastries because she did not want to compete with the large bakeries for the "bread market". As she was close to office buildings, she decided to try and increase her daily cash-flow by selling "fresh-cut" sandwiches.
Having spent most of her savings on purchasing equipment and supplies, renovating shop premises, and employing two shop assistants, she did not want to spend money for an accountant to set up an accounting system. She wondered whether she should base her cost-management system on the system adopted in the large bakery.
As an apprentice, she had not been involved in the management aspects of operating a bakery, and she did not know what sort of information she would need to ensure that she did not lose her investment in her business. She was certain that there was a ready and reasonably large market for her bakery products. She felt that all she needed was a cash-statement each week to show her what her receipts and payments were, and an annual set of accounts to make sure that she was operating at a profit. To ensure that she recovered her costs, she intended to follow the product costing strategy used by the large bakery that she was an apprentice in.
The large bakery produced a variety of bread using highly automated processes. In ascertaining the cost of its different types of bread, the large bakery treated flour as a direct cost. All other costs were treated as indirect costs, and were allocated. It was a simple system that Toni thought she could emulate. However, the large bakery did not produce cakes and pastries. Cakes and pastries require highly specialised
labour skills because the processes may not be easily standardised and automated.
Required:
Toni is relying on weekly cash flow and annual financial accounts to ensure that she remains in business in the long-term. She is also attempting to ensure that her pricing and cost-management strategies are appropriate by adopting the cost management system used in the large bakery. Do you agree with Toni's approach?
Support your opinion by addressing the following issues:
a) How does one ensure that a cost-management system provides relevant and useful information?
b) Toni is relying on financial feedback, and the product costing method adopted by the large bakery. What are the strengths and weaknesses of these approaches?
c) Outline any changes you would recommend that would help Toni to manage her business. Explain how your changes would address the weaknesses that you have identified in Toni's proposed system.