Community Catering (CC) began as a meals on wheels agency, providing dinners to elderly people and individuals
Question:
Community Catering (CC) began as a "meals on wheels" agency, providing dinners to elderly people and individuals who were permanently or temporarily homebound. Almost all of its clients were single and live alone. Over the years, its menu has expanded based on market research into customer preferences. CC continued to provide its clients with only one meal a day. All meals were sold in "collections" of seven a different meal for each day of the week, and deliveries (of seven meals each) were made once per week to each client (clients often froze a few of the meals for use in the latter half of the week).
During the past few years, CC had encountered some competition for its services. In response, CC decided to offer specialty meals. There were two main differences between CC's specialty meals and its regular meals: (1) specialty meals used a variety of nonstandard ingredients, frequently including organically grown fruits and vegetables, and often being meatless, and (2) because of greater need for freshness, specialty meals were delivered daily (one per customer). The new strategy seemed to be working. During the past year, approximately 80,000 of CC's 200,000 meals were specialty meals. The remainder were regular meals.
CC's pricing policy was to add 20 percent to the total cost of a meal. CC's cost accounting system calculated the cost of a meal by summing its direct and indirect costs. Direct costs included ingredients, packaging materials, and kitchen labor. When a new meal was introduced, CC's accounting staff spent considerable time determining exactly what ingredients it contained and measuring the time it took the prep and line staff to actually prepare the ingredient and cook the meals. Pre staff were those kitchen workers who washed and cut the ingredients, prepared sauces, and took care of other tasks needed prior to actually cooking the meals. Line staff cooked and assembled the ingredients for each meal. Indirect costs were classified into two categories: administration and general (A&G), and occupancy. A&G included the costs of the administrative staff, as well as the purchasing staff, drivers, and dietitians. Occupancy included rent, utilities, and cleaning.
CC's accountant, Ted Smith, explained the process he followed to arrive at a per meal cost as follows.
According to our experiences, A&G is always about 220 percent of kitchen labor, and occupancy is always about 20 percent of direct costs. Once we know our budgeted kitchen labor and other direct costs, we use the information to set the budgets for A&G and occupancy. Sometimes the actual budgeted amounts are slightly more or less than these standards, but we always come pretty close. The overhead rates were quite handy when we shifted to the special meal strategy. Both ingredient and kitchen labor costs were higher with special meals than with our regular meals, and our overhead rates were helpful in showing us the higher total cost of the special meals. Ted's computations are shown in Exhibit 1.
However, a growing number of regular customers were complaining about CC's prices. Some said that they had tried the meals of competing organizations and found them comparable with prices about $1 or $1.5 below those of CC's. In addition, CC's consultant also comments that CC's cost accounting system is giving misleading information, and CC may actually be losing money on specialty meals. Do you think that CC has to redesign its costing accounting system?
Exhibit 1 Cost accounting data
Total costs | ||
Ingredients | 426,200 | |
Packaging materials | 57,000 | |
Kitchen labor (pre and line) | 348,000 | |
Overhead | ||
Admin and General | 764,500 | |
Occupancy | 170,000 | |
Total | 1,765,700 | |
Per meal costs | Regular | Special |
Ingredients | 1.2 | 3.53 |
Packaging materials | 0.28 | 0.28 |
Kitchen labor (pre and line) | 1.5 | 2.09 |
Overhead | 2.98 | 5.9 |
Admin and General | 3.3 | 4.59 |
Occupancy | 0.61 | 1.21 |
Total | 6.89 | 11.7 |
Requirements
- Using case facts, list the signs that indicates inadequate costing accounting system.
- Discuss how the current costing system captures (or fails to capture) the differences between regular and specialty meals.
- Identify the cost category (shown in Exhibit 1) that deserves examination for further improvement when calculating the cost per meal
- Offer "concrete" advice regarding how to improve the current costing systems. No calculations are required.
- Comment on this statement "The current costing system shows that a special meal has higher costs than a regular one. This result is consistent with CC's management's expectation. The current costing system, while not perfect, should be adequate. Any effort to improve the cost accounting system would be a waste of time."