Because friends and neighbors frequently praise her baking skills, Susan Nazari plans to start a new business baking cakes for customers. She wonders how to determine the cost of her cakes. Assume financial statement data are prepared in accordance with GAAP.
Required
a. Identify and give examples of the three components of product cost incurred in producing cakes.
b. Explain why measuring product cost for a bakery is more complex than measuring product cost for a retail store.
c. Assume that Susan decides to bake cakes for her customers at her home. Consequently, she will avoid the cost of renting a bakery. However, her home utility bills will increase. She also plans to offer different types of cakes for which baking time will vary. Cakes mixed with ice cream will require freezing, and other cakes will need refrigeration. Some can cool at room temperature. Under these circumstances, how can Susan estimate the amount of utility cost required to produce a given cake? Identify two costs other than utility cost that she will incur that could be difficult to measure.