Question 3

YummyBites Goodies Limited (YBG) specialises in producing three types of high-quality cakes: Chocolate, Strawberry and Vanilla. 

For a rich nutritional benefit, YBG uses Organic Eggs in all its cakes. YBG serves a niche market that Organic laying eggs were affected by a disease and organic eggs are in limited supply. Alice Swish, the Buying Manager has been informed by the organic eggs supplier that total annual organic eggs supply for 2023 is estimated to be limited to 7,800.

YBG’s financial year starts in September and ends on the 31st of August. The maximum market demand and organic eggs requirements per cake are shown below:

Budgeted data year ending 31 August 2023

The selling prices, other raw materials and labour costs rates per cake for 2023 financial year will be the same as those in 2022.

For quality assurance and freshness, YBG operates on a just-in-time production (JIT) method so that opening and closing inventory levels are zero.

The sales director has already accepted an order for 500 Chocolates and if not fulfilled, would incur a financial penalty of £10,000. This contract order is not included in the Chocolate’s maximum market demand figure.

You are the Management Accountant and Clara Ores the Finance director has requested you to advise YBG’s directors whether to:

1. first fulfil the contract and then prioritise production in the normal way 

or 

2. breach the contract and incur the penalty.

Recorded results for previous financial years is below:

Required:

Use management accounting techniques for example High-Low Method where applicable.

3.1 Applying marginal costing techniques, rank the products.

3.2 Prepare a budgeted production schedule and a marginal cost income  statement  (analysed by product including the total) for the year ending 31 August 2023  assuming that the Chocolate contract IS honoured

3.3 Prepare a budgeted production schedule and a marginal cost income  statement  (analysed by product including the total) for the year ending 31 August 2023  assuming that the Chocolate contract IS NOT honoured

3.4 Considering calculations above and other qualitative issues, advise YummyBites Goodies (YBG) directors whether to honour or dishonour the Chocolate Contract.

3.5 Budgeting serves various purposes including planning, control, motivation and communication. You have been requested by Clara Ores the Finance Director to explain to YBG directors the importance of budgeting in light of the purposes above.