(Tiểu luận) topic job order costing of milk tea business

Each item tracked in the job order costing system should have a job cost record that lists the materials used to create that item, the number of people that worked to make that item, how

HO CHI MINH CITY UNIVERSITY OF TECHNOLOGY

SCHOOL OF INDUSTRIAL MANAGEMENT

MANAGERIAL ACCOUNTING (IM 2019)

TOPIC: JOB ORDER COSTING OF

MILK TEA BUSINESS Lecturer: Dr Duong Nhu Hung

Group: The Flash

OFFICE FOR INTERNATIONAL STUDY PROGRAMS

Table of Contents

I – INTRODUCTION 1

II – LITERATURE REVIEW .2

III – DATA COLLECTING 5

IV – ANALYSIS 1 How does the firm control the costs of making the products/services? 7

2 Does milk tea shop tend to be labor intensive or machine intensive? 12

3 How does the firm deal with ethical issues? 12

V – CONCLUSIONS AND RECOMMENDATIONS 14

VI – REFERENCES

APPENDIX

1 Transcript of the interview

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I – INTRODUCTION

Job order costing is a costing method which is used to determine the cost of manufacturing each product This costing method is usually adopted when the manufacturer produces a variety of products which are different from one another and needs to calculate the cost for doing an individual job It helps the company make estimates about the value of materials, labor, and overhead that will be spent while doing that particular job Efficient job order costing helps companies to create quotes that are low enough to be competitive but still profitable for the company That’s the reason why job-order costing is also used extensively

in service industries

Each item tracked in the job order costing system should have a job cost record that lists the materials used to create that item, the number of people that worked to make that item, how long it took to make the item, and the manufacturing overhead amount for that product Moreover, in job order costing, the job cost records serve as the subsidiary ledger or documentation for the manufacturer's cost of the work-in-process inventory, the finished goods inventory, and the cost of goods sold

One of the most typical, visible, and familiar examples is the business model of milk tea Thousands of milk tea brands sprung up all around us Every day, thousands of cups of milk tea are sold and consumed nationwide We realized that this was a rather intriguing topic, so we decided to analyze the homemade bubble tea business to see how they could compete with other brands of milk teas in the market of VietNam This is also a type of business that chooses job-order costing

The business we choose to follow to determine the cost of a product or service, how the firm controls the costs of making the products/service, and how the firm deals with ethical issues is Bobo Milk Tea This business is located in Tan Binh District, Ho Chi Minh city The shop has been operating for 7 years now In the beginning, Ms Chau - the owner of this milk tea shop decided to start a homemade milk tea shop Then, in the last 2 years, she started selling dumplings, and dim sum to have more choices for customers as well as earn an extra income She started to scale up to 10 tables and recruited one more staff member After operating for a while, the store found that job-order costing is an effective calculation

current inventory to prevent unexpected losses from occurring Besides, it is still easier than other methods like ABC costing or process costing

II – LITERATURE REVIEW

Job order costing or job costing is a system for assigning and accumulating manufacturing costs of an individual unit of output The job order costing system is used when the various items produced are sufficiently different from each other and each has a significant cost

The elements of cost include all the different expenses which are incurred during the production of an item and should be included in its final price These include:

 Direct material cost: The material cost is the cost incurred for purchasing materials

that are essential for the manufacturing process These costs are classified as direct costs based on their traceability to the product They’re direct costs if the raw material used to manufacture the product is one of the essentials and is directly used in the product

For example, in our project, it will be ingredients like milk, sugar, and topping … Indirect

material costs are any materials that are needed to supplement the production process such as straws, plastic spoons, etc

 Direct labor cost: Direct labor cost is the cost of the employees who are directly

involved in the product’s production process The total cost of direct labor includes all expenses incurred on employment of direct labor including their wages, social security costs, and other monetary benefits given to direct labor employees/workers For example, if you work for an automobile manufacturer and your job is to paint the cars as they are completed, your salary would be considered a direct labor cost Similarly, the expense paid for the bartender in a milk tea shop can be considered as a direct labor cost

 Manufacturing overhead cost: Manufacturing overhead cost is any other

manufacturing cost, besides direct labor and direct materials, incurred during the manufacture of the product Some of these costs are variable overhead costs bc they vary in direct proportion to changes in the level of production and some are fixed overhead costs bc they remain constant as the level of production fluctuates It includes expenses like the electricity bill, janitorial supplies, depreciation of the machines used, and property taxes

The cost of goods manufactured (COGM) is transferred to the finished goods

inventory account during the period and is used in calculating the cost of goods sold on the income statement The schedule of cost of goods manufactured is used to calculate the cost of producing products for a period of time It contains 3 elements: direct materials, direct labor, and manufacturing overhead

COGM = Beginning WIP Inventory + Total Manufacturing Cost – Ending WIP

Inventory The cost of goods sold (COGS) is the sum of all direct costs associated with making

a product The schedule of cost of goods sold contains three elements of product costs — direct materials, direct labor, and manufacturing overhead — and that summarizes the portions of those costs that remain in the ending Finished Goods inventory and that are transferred out of Finished Goods into COGs

COGS = Beginning Finished Goods + COGM - Ending Finished Goods How to calculate the job-order costing system:

Typically, a business using a job-order costing system will have 2 or more departments to create a product One of the most common ways to value its selling price is using cost-plus pricing

Cost-plus pricing: Cost-plus pricing is also known as markup pricing It's a pricing

method where a fixed percentage is added on top of the cost it takes to produce one unit of a product (unit cost) The resulting number is the selling price of the product

A 5-step process in job order costing:

1st: Calculate the estimated total manufacturing overhead cost for each department

Y = a + bX

Where: Y = The estimated total manufacturing overhead cost

a = The estimated total fixed manufacturing overhead cost

b = The estimated variable manufacturing overhead cost per unit of the allocation base

X = The estimated total amount of the allocation base

2nd: Next we will find predetermined overhead rate in each department by using this formula:

POHR =

Where: POHR - Predetermined overhead rate

Using predetermined departmental overhead rates is that they presumably provide a more accurate accounting of the costs caused by jobs, which in turn, should enhance management planning and decision making

Predetermined overhead rates that rely upon estimated data are often used because: + Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period

+ Actual overhead costs can fluctuate seasonally, thus misleading decision-makers

3rd : Calculate the amount of overhead applied from departments to product

Overhead application: The process of assigning overhead cost to specific jobs

Applied overhead is added to direct materials and direct labor to calculate total job cost

Overhead applied to Job = Predetermined overhead rate × Actual amount of

the allocation base used by Job

4th : Calculate the total job cost for product

Total job cost = Direct materials + direct labor + applied overhead

5th: Calculate the selling price for the product

In this step, we identify the selling price by:

Selling price = Total job cost + Total job cost x the markup percentage Plantwide overhead rate: A single predetermined overhead rate that is used to

allocate all of a company's manufacturing overhead costs to products or cost objects It is most commonly used in smaller entities with simple cost structures

Identify more than one overhead cost driver → improve job cost by using multiple predetermined overhead rates

Conversely, a single plantwide overhead rate is not acceptable if a company has a large amount of overhead to allocate, services provided by the various departments are highly differentiated, or it is apparent that a number of different allocation bases should be used

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Multiple predetermined overhead rates: A costing system with multiple overhead

cost pools and a differ predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company Such a system, while more complex, is considered to be more accurate

Because much of the overhead often consists of fixed costs that do not change as the number of machine hours incurred goes up or down and spending on overhead items may or may not be under control, which leads the company to apply less overhead to production than

it actually incurs This creates what is known as underapplied overhead In this case, the business needs to increase COGS or decrease net operating income to reflect the actual overhead

Similarly, if a company applies more overhead to production than it actually incurs, it creates what is known as overapplied overhead Once overapplied overhead occurs, the business needs to decrease COGS or increase net operating income

III – DATA COLLECTING

Interviewee: Nguyễn Ngọc Quỳnh Châu (the owner of BoBo Milk Tea)

Phung: Hello, Mrs Chau, as far as I know, you've been the owner of BoBo Milk Tea

for nearly 7 years So the first question is: how does your company apply the factors in the job order costing in business, and can you give us the particular number of materials that you use for one product as well as its selling price?

Mrs Chau: Hello, Phung, as you know, there are many factors in job order costing

that we need to calculate once opening a small business For instance, tea leaves, condensed milk, and powdered milk, … are the direct materials once making a cup of milk tea Because the characteristic of job order costing is undertaken to the customer’s specific requirements per order and each job price is agreed with the customer, it is hard to have the particular number of materials that you use for one product Overall, 100 grams of tea leaves, 500 ml of milk, 200 ml of condensed milk, 300 grams of powdered milk, 250 gram of sugar, and 2 liters

of water can make about 25 cups of milk tea Truly speaking, the Cost of goods sold is approximately 8,000 VND while the selling price of one cup is 15,000 VND However, people often add toppings such as pudding, fruit jelly, and bubbles,… so the price per cup is about more than 30,000 VND Moreover, there are some manufacturing overheads such as electricity expenses, machine depreciation costs, waiter wages,… or direct labor costs you need to take into account once calculating the product margin Finally, make sure that you put

the opportunity cost in this calculation to control your business cost and know your business’s profit accurately

Phung: Well, besides milk tea, does your business sell other products?

Mrs Chau: Absolutely, yes! Besides milk tea, my business also sells dim sum as a

snack for customers This product also has direct labor, direct materials, and manufacturing overhead for a particular job, and the way we calculate this product margin is as similar as milk tea However, it is quite simple to calculate this job because this job performed less customer-specific requirements than milk tea

Phung: Mmm, Can you tell me about the number of sales per product in a day? Mrs Chau: Well, talking about the number of sales, the number of cups of milk tea

ranges from 50 to 70 cups per day while more than 30 packs of dim sum are sold daily

Phung: Oh, I got it May I ask you a sensitive question that would you please share

with us some ethical issues that your business has been involved in?

Mrs Chau: Truly speaking, there are a number of ethical issues when I start this

business First is the problem that the sellers import unknown ingredients in order to gain more profit and competitive advantage For example, the sellers use milk that is out of date or add toxic chemical components to make their drink or food to be tastier and more attractive The second is tax evasion or tax avoidance Honestly, a lot of businesses use an accounting loophole that helps them evade taxes Finally, some problems related to the service attitude and business quality might violate the company’s ethics All of these problems can damage a company's credibility and negatively impact employee performance

Phung: Yes, so much thanks for your participation and sharing in my interview Mrs Chau: Oh nothing Now I have to go and review the orders Hope that the

information is useful for your project See you later

IV – ANALYSIS

BoBo Milk Tea store: Revenue and expenses of milk tea and dim sum in recent month

1 How does the firm control the costs of making the products/service?

Profit margin is any profit a company generates that goes to its owners, who may choose to distribute the money to shareholders as income or allocate it back into the business

to finance further company growth

+ Profit margin of Milk tea: Net income/net sale = 10.039.500 / 50.000.000 = 20,079% + Profit margin of dim sum: Net income/net sale = 2.929.400 / 20.000.000 = 14.647%

The time open 7 am - 11 am (sell both milk tea and dim sum), and 1 pm - 5 pm (only milk tea)

The difference between the two data of profit comes from the cost of goods sold The business wastes a lot of money by making dim sum and milk tea by hand We commonly sold out dim sum at 11 am, however, a lot of customers still ask about dim sum after 11 am (approximately 25% per day) About milk tea, after 5 pm, we also receive a lot of demand for milk tea (about 20% per day) In conclusion, the number of cups of milk tea does not meet the demand and neither is the dim sum We decide to use machine-intensive methods First of all, the machine helps us to make the topping of milk tea faster by 15% and make more 30% at the same time (from 1800 cups per month to 2340 cups per month, 14 cups will be sold per hour) In addition, the quality of topping will be controlled Finally, when we apply machine-intensive, the profit margin of milk tea will increase to 27,2% (more than 7% than last month)

Revenue 65,520,000

Expenses

Tea leaves 2,860,000

Condensed milk 520,000

Powdered milk 1,040,000

Milk 1,560,000

Ice 455,000

Sugar 260,000

Toppings 4,940,000

Plastic cups 845,000