Proposal Final

SUBMITTED BY: Screaming Eagles, LLP

September 29, 2014

Response to Request for ProposalSUBMITTED TO: HUMBLE PIES, INC.

Screaming Eagles, LLP, thanks you for the opportunity to respond to your request for an

effective costing system that will facilitate more accurate pricing decisions and, ultimately,

increase profitability. From the information you have provided, we recognize the need to allocate

overhead costs efficiently to represent the actual cost of each product line, to evaluate specific

product costs in a timely manner, and to plan for future economic growth. This proposal

summarizes a comprehensive response to your company’s specific requirements.

Identifying Business Information Needs:

Before implementing a new costing system, we will jointly identify business information needs

that align with your company’s mission statement, objectives, strategic plan, and business rules.

This preliminary list outlines the information needs we ascertained from your brief request:

Sales price per unit

Standard costs (budgeted costs per unit) and actual costs of raw materials, direct labor, and

overhead

Cost of labor specific to production activities such as mixing, filling, baking, and packaging

Accurately Tracking Costs to Understand Profit Drivers:

After identifying your information needs, we recommend you track Humble Pies’ costs

throughout various activities that occur in the production process. Monitoring costs at the batch-

level eliminates uncertainties by differentiating which activities consume the most resources

based on product lines, flavors, and packaging/labeling methods. More importantly, you will

identify where inefficiencies occur during the production process to pinpoint cost savings

opportunities.

Direct Materials:

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Systematically tracking direct materials costs allows you to establish standard costs for each

product to create performance benchmarks. Your raw materials should be categorized into three

groups to capture quantities used:

Description ExamplesMain ingredients Higher cost items necessary in all pies Flour, sugar, eggsFlavor additives Lower cost standard ingredients Spices, dyes, saltsProduct-specific ingredients Ingredients unique to each flavor Nuts, bacon, fruit

Direct Labor:

Under the new system, workers use biometric time clocks throughout the plant to select their

activities and enter batch numbers. As an alternative to applying an average cost across the

products, this method establishes standard costs. This accurate projection of labor hours reduces

inefficiencies while appropriately matching staff to production lines.

Manufacturing Overhead:

We suggest allocating overhead costs using an activity-based costing approach at a batch-level to

match resources to products accurately and to avoid cost distortion. Overhead costs cannot be

directly traced to a specific product but are necessary for the production process such as

production supervisors’ salaries, repair and maintenance expenses, and utilities. To allocate

overhead costs appropriately, the main factor that causes change in each activity’s costs must be

identified. These factors, termed cost drivers, and their associated activities are summarized

below:

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Activity Cost Driver MethodologySupervising Direct labor hours Supervision of bakery laborersPurchasing and receiving raw materials

Number of purchase orders

Utilization of just-in-time (JIT) purchasing methods

Storing raw materials Volume of materials Limited storage space capacityProduction scheduling and transporting materials to line

Number of customer orders

Utilization of JIT purchasing and production methods

Cleaning/sanitizing Number of batches Activities completed before each batch

Mixing/filling/baking pies Machine hours Mechanized activities and production time

Cooling Number of pies Limited storage space capacityDecorating/slicing/arranging/packaging/labeling

Direct labor hours in these activities

Personalized steps completed by bakery laborers

Freezing Volume of finished goods Limited storage space capacity

Improving Decision-Making through Format Changes:

We recommend using a variable costing income statement for internal use. This format differs

from traditional external reporting formats required by generally accepted accounting principles

in the following ways:

Introduces cost of goods sold as a purely variable cost that varies directly and

proportionately with production volume

Excludes fixed manufacturing overhead from the cost of inventory by expensing these costs

in the current period, regardless of production volume

Removes per unit fixed cost volatility found in traditional external reporting

Eliminates potential distortion of operating profits through over-production and unsold units

Determines which products are contributing the most to the bottom line

Accurately represents contribution margin (sales minus variable costs) by product line

Allows your management team to make better pricing decisions and reveal if any line

should be re-examined or discontinued

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Your expenses would be reported in four categories (refer to Exhibit 1 in Appendix):

Variable production expenses: Raw materials, bakery labor attributed to hourly workers,

supplies, freight and shipping-in, portion of electricity and gas, and water

Variable selling and administrative expenses (period): Freight and shipping-out, portion of

electricity and gas, and brokers’ commissions

Fixed production expenses: Bakery labor supervisors, repairs and maintenance, and portion

of rent expense

Fixed selling and administrative expenses (period): Administrative salaries, telephone and

Internet, portion of rent expense, and co-owners’ salaries

Developing Reports to Support Business Strategies:

The new system transforms relevant data into useful reports to help managers fulfill their

planning, directing, controlling, and deciding responsibilities in production operations. Example

reports referenced in the appendix are described below:

Budgeting reports (support short-term financial goals by presenting net income projections

driven by sales)

Sensitivity reports (represent the impact on profit as sales price, sales volume, and costs

change)

Performance reports (determine variances—differences between actual and budgeted costs)

Cash flow reports (verify available cash from operations)

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Screaming Eagles, LLP, is experienced in developing a system that will achieve your company’s

goals and foster opportunities for future growth. Our joint efforts will constitute a system

encompassing valuable information in an organized format that allows managers to examine

operating performance and enhance their decisions. As Humble Pies, Inc., continues to grow,

improved decisions will escalate your profits and maximize your return on investment. We are

excited to implement this system, and we look forward to the opportunity to work with you.

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Right Information

Right Format

Enhanced Decisions

Maximized Return on Investment

Ready to help you soar

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APPENDIX

Sample Reports:

Exhibit 1: Variable Costing Income Statement

Exhibit 2: Budgeting Reports

Exhibit 3: Sensitivity Reports

Exhibit 4: Performance Reports

Exhibit 5: Available Cash Reports

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Single 9" Pre-Product Line: Servings Sliced Full Variety Duo-Pack Total

Sales -$ -$ -$ -$ -$ 766,667$ Variable ExpensesProduction

Raw Materials 327,934 Bakery Labor 123,838 Supplies 3,833 Freight & Shipping-In 4,907 Utilities - Electricity 8,832 Utilities - Gas (ovens) 2,914 Water 920 Total Variable Production Exp. - - - - - 473,178

Selling & Administration (Period)Freight & Shipping-Out 64,707 Utilities - Electricity 981 Utilities - Gas (ovens) 153 Brokers' Commissions 30,667 Total Variable Selling & Admin. Exp. - - - - - 96,509 Total Variable Expenses - - - - - 569,686

Contribution Margin - - - - - 196,981 Fixed ExpensesProduction

Bakery Labor (Supervisor) 34,929 Repairs & Maintenance 4,293 Rent Expense 16,292 Total Fixed Production Exp. - - - - - 55,514

Selling & Administration (Period)Administration Salaries 41,367 Telephone & Internet 2,300 Rent Expense 2,875 Co-owners' Salaries 25,300 Total Fixed & Admin. Exp. - - - - - 71,842 Total Fixed Expenses - - - - - 127,356

Operating Income -$ -$ -$ -$ -$ 69,625$

Humble Pies, Inc.Variable Costing Income Statement

For Period Ending May 31, 201410" Refrigerated

Exhibit 1: Variable Costing Income Statement

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July September October 3rd QuarterUnit Sales - - - - Unit Selling Price -$ -$ -$ -$ Total Sales Revenue -$ -$ -$ -$

Type of:Cash Sales (20%) -$ -$ -$ - Credit Sales (80%) - - - -$ Total Sales Revenue -$ -$ -$ -$

July September October 3rd QuarterUnit Sales (from Sales Budget) - - - - Plus: Desired End Inventory - - - - Total Needed - - - - Less: Beginning Inventory - - - - Units to Produce - - - -

July September October 3rd QuarterUnits to be Produced (from Production Budget) - - - - x Qty. of DM Needed per Unit - - - - Qty. Needed for Production - - - - Plus: Desired End Inventory of DM - - - - Total Qty. Needed - - - - Less: Beginning Inventory of DM - - - - Qty. to Purchase - - - - x Cost per DM Unit -$ -$ -$ -$ Total cost of DM Purchases -$ -$ -$ -$

Humble Pies, Inc.Sales Budget for Single Servings

For the Quarter Ending June 30, 2014

Direct Materials (DM) Budget for Single ServingsFor the Quarter Ending June 30, 2014

Humble Pies, Inc.Production Budget for Single ServingsFor the Quarter Ending June 30, 2014

Humble Pies, Inc.

Exhibit 2: Budgeting Reports

Sensitivity Analysis (Monthly)Note: Alter scenarios by changing blue items.

% $ per UnitPrice Per Unit 11.89$ Number of Units Sold 64,500 Total Sales $766,667 100%Less: Variable Production Exp. $473,178 62%Less: Variable Selling Exp. $96,509 13%Total Variable Exp. $569,686 74% $8.83Contribution Margin $196,981 26%Less: Fixed Production Exp. $55,514 7%Less: Fixed Selling & Admin. Exp. $71,842 9%Total Fixed Exp. $127,356 17% $1.97Operating Income $69,625 9% $1.08

Min. Return on Investment (ROI) 8%Average Operating Assets $5,500,000Target Annual Income $440,000Target Monthly Income $36,667

Contribution

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Break-Even Point (units) = 41,702 Break-Even Point ($'s) = 495,681$

Targeted Income based on ROI(units) = 53,708 Targeted Income based on ROI ($'s) = 638,391$

Break-Even Analysis Summary

Exhibit 3: Sensitivity Reports

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Standard Cost per

Unit Actual

Flexible Budget Variance

Flexible Budget

Master Budget

Units Sold 64,500 64,500 65,000 Sales 12.00$ 766,667$ (7,333)$ U 1% 774,000$ (6,000) U 780,000$ Variable Expenses

Production

Raw Materials 5.00 327,934 5,434 U 2% 322,500 (2,500) F 325,000 Bakery Labor 2.40 123,838 (30,962) F 20% 154,800 (1,200) F 156,000 Supplies 0.05 3,833 608 U 19% 3,225 (25) F 3,250 Freight & Shipping-In 0.10 4,907 (1,543) F 24% 6,450 (50) F 6,500 Utilities - Electricity 0.10 8,832 2,382 U 37% 6,450 (50) F 6,500 Utilities - Gas (ovens) 0.05 2,914 (311) F 10% 3,225 (25) F 3,250 Water 0.01 920 275 U 43% 645 (5) F 650 Total Variable Production Exp. 7.71 473,178 (24,117) F 5% 497,295 (3,855) F 501,150

Selling & Administration (Period)

Freight & Shipping-Out 1.00 64,707 207 U 0% 64,500 (500) F 65,000 Utilities - Electricity 0.02 981 (309) F 24% 1,290 (10) F 1,300 Utilities - Gas (ovens) 0.01 153 (234) F 60% 387 (3) F 390 Brokers' Commissions (4% of Sales) 0.48 30,667 (293) F 1% 30,960 (240) F 31,200 Total Variable Selling & Admin. Exp. 1.51 96,509 (628) F 1% 97,137 (753) F 97,890 Total Variable Expenses 9.22 569,686 (24,746) F 4% 594,432 (4,608) F 599,040

Contribution Margin 2.78$ 196,981$ 17,413$ U 10% 179,568$ (1,392)$ F 180,960$ Fixed Expenses

Production

Bakery Labor (Supervisor) 34,929 1,596 U 5% 33,333 - 33,333 Repairs & Maintenance 4,293 293 U 7% 4,000 - 4,000 Rent Expense 16,292 - 0% 16,292 - 16,292 Total Fixed Production Exp. 55,514 1,889 U 4% 53,625 - 53,625

Selling & Administration (Period)

Administration Salaries 41,367 - 0% 41,367 - 41,367 Telephone & Internet 2,300 - 0% 2,300 - 2,300 Rent Expense 2,875 - 0% 2,875 - 2,875 Co-owners' Salaries 25,300 - 0% 25,300 - 25,300 Total Fixed & Admin. Exp. 71,842 - 0% 71,842 - 71,842 Total Fixed Expenses 127,356 1,889 U 2% 125,467 - 125,467

Operating Income 69,625$ 15,524$ F 29% 54,101$ (1,392)$ U 55,493$

Humble Pies, Inc.Master Budget Performance Report

For Period Ending May 31, 2014

Volume Variance

Variance %

Exhibit 4: Performance Reports

Notes: “F” represents favorable variances; “U” represents unfavorable variances. Standard per unit costs and master budget items are estimates based on actual information provided for

May 2014.

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Cash Flows from Operating Activities:Net income 69,625$

+ Depreciation expense -$ + Amortization expense -

-/+ Gain (loss) on sale of plant asset - -

-/+ Increase (decrease) in accounts receivable (net) - +/- Increase (decrease) in inventory - +/- Increase (decrease) in accounts payable -

- Cash generated from operations 69,625$

Humble Pies, Inc.Statement of Cash Flow - Operations

For Period Ending May 31, 2014

Adjustments to reconcile net income to net cash provided by operating activities:

Exhibit 5: Available Cash Reports