Reference no: EM13749211

Scenario Carol Anne Barrow’s mother was known throughout the county for her pies and pas- tries. She was the odds-on favorite to win blue ribbons at every county fair. Carol Anne shared her mother’s love for baking, and turned it into a multimillion-dollar baking company—Blue Ribbon Baking, Inc. Founded in 1967, Blue Ribbon Baking produces a wide variety of fruit and cream pies, as well as coffee cakes and tarts. The pies are frozen and sold through grocery stores in a five-state region. For years, Carol Anne felt that the business model was working. However, increased competition and decreasing margins in grocery stores led her to search for other areas in which the firm could expand. The executive group at Blue Ribbon Baking searched for months for additional product and service opportunities. The group had narrowed down the expansion opportunities to two. The first was a proposal to open free- standing Blue Ribbon Cafes. The second was the opportunity for Blue Ribbon Baking to serve as the exclusive provider of mini coffee cakes to a fast-food chain. In looking at these possibilities, Carol Anne realized that it was crucial to under- stand the costs of each. She had a good understanding of the manufacturing and selling costs of the basic pie line—making dough; rolling out and cutting individual pie shells; filling the shells with fruits, chocolate, coconut, pumpkin, etc.; and freezing and packaging. She also understood the costs of selling the pies to distributors and grocery stores. Now she needed to develop just as good an understanding of the potential costs and revenues of the new businesses under consideration. What were the costs of opening freestanding restaurants? What would they provide in addition to pies and pastries? Did Blue Ribbon Baking have the necessary expertise? For the fast-food chain, what quantities would be necessary? What special processing equipment would be needed? Would a new factory be needed? Would more specialized equipment be required? What about the labor—could her current employees handle the new process? How would Blue Ribbon Baking get the breakfast cakes to the chain’s outlets? Carol Anne directed her executive team to develop a comprehensive assessment of the costs and potential revenues of each opportunity. Two days later, the executive team met again. At that time, the controller, Luis Acevedo, reported that Blue Ribbon’s current cost accounting system did not provide much guidance for the projection of costs to the potential product and service lines. The pie and tart manufacturing lines used many of the same activities. However, restaurants would have very different activities, and provide ser- vices as well as products. The mini coffee cakes would have very different packaging and distribution activities. If Blue Ribbon Baking expanded into these areas, the cost accounting system would require significant upgrading and refinement—one that could handle the assignment of different activities to the various product and service lines. The group agreed to consider the impact of potential expansion on production, marketing, and administrative costs, and to start pilot projects in each area so that supporting information could be gathered before the company was fully committed to either opportunity.

Questions to Think About

1. What is the difference between products and services? How might that affect accounting?

2. Why wouldn’t the current product cost accounting provide useful information for the expansion into the two new product lines?

3. How would the pilot projects allow Blue Ribbon Baking to gather new accounting information?

 

4. Is assigning costs accurately as important for services as it is for products?