Chapter 18, Problem 6BTN

To determine

1. Introduction:

Business Activities and Nature of Costs in Fast Food Business

• There are several business activities that take place right from when a customer enters the organization up until when he leaves after successfully placing and receiving an order.

• Some of the activities are contributory to costs and profits and some are non-monetary items. However the non-monetary items also have a contribution to the bottom line as they indirectly influence the revenues and profits.

• Examples of Value Added activities are: Process of Preparation of Order, Packaging and Delivery of goods etc.

• Examples of Non Value Added activities are: Waiting time to process customers' orders

Business activities from the time a customer arrives to the time the customer departs.

Answer to Problem 6BTN

Solution:

Following are the activities from the time a customer arrives to the time the customer departs:

1. Entering the store
2. Looking at the menu
3. Waiting in line to give order
4. Giving the order to the attendant
5. Paying for the order
6. Waiting for the order to get prepared
7. Order gets prepared
8. Order gets inspected
9. Order gets Packaged
10. Customer either eats in the outlet or takes the order as a delivery and leaves.

Explanation of Solution

• The entire cycle of business activities from the time a customer arrives to the time the customer departs comprises of several value added and non-value added activities.

• Value added elements refer to the time taken for those activities that add quality and value to the overall production process concerning manufacture of goods. Example − Process Time.

• Process time is the time spent on actually producing the product. It refers to the time taken to convert the goods from raw materials to interim or final finished products. Activities covered here are: Entering the store, Looking at the menu, Waiting in line to give order, Giving the order to the attendant, Paying for the order, Order gets prepared and Order gets packaged.

• Non Value added elements refer to the time taken for those activities that do not add quality and value to the overall production process concerning manufacture of goods and that need to be eliminated to the greatest extent possible. Example - Waiting for the order to get prepared, Order gets inspected

Conclusion

Hence the Business activities from the time a customer arrives to the time the customer departs are listed.

To determine

2. Introduction:

Cost Classification

• The time taken from the start of the sale process, i.e. the receipt of a confirmed sales order, to the completion of the transfer of goods or services, i.e. dispatch of goods consists of several activities and costs. Components of costs are Costs of Value added activities comprising of Variable costs and manufacturing costs and Costs of Value added activities such as fixed costs.

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced. Examples are costs of direct material and direct labor.

• Manufacturing costs are costs that are directly incurred in connection with manufacture of goods. Examples are Direct materials and Manufacturing Overhead

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced. Examples are costs of factory rent, depreciation on plant and equipment

Costs from Business activities from the time a customer arrives to the time the customer departs.

Answer to Problem 6BTN

Solution:

Activity	Costs	Value Added or Non Value Added Activity
Entering the store	Cost of Display, Advertising	Value Added as it invites customers
Looking at the menu	Cost of Menu printing	Value Added as it enables customers to choose goods
Waiting in line to give order	Cost of Store Facilities such as Electricity, Air conditioning etc.	Non value added as it does not contribute to revenue
Giving the order to the attendant	Cost of Attendants' salary	Non value added as it does not contribute to revenue
Paying for the order	Cost of Electronic Banking, Capital expenses of Cash registers, payment facilities etc.	Non value added as it does not contribute to revenue
Waiting for the order to get prepared	Cost of furniture and maintenance of store, rent of store, air conditioning etc.	Non value added as it does not contribute to revenue
Order gets prepared	Cost of manufacturing orders − material, labor, overhead	Value added as it leads to manufacture of goods
Order gets inspected	Cost of inspecting orders − labor, overhead	Non value added as it does not contribute to revenue
Order gets Packaged	Cost of packaging orders − material, labor, overhead	Value added as it leads to manufacture of goods
Customer either eats in the outlet or takes the order as a delivery and leaves.	Cost of furniture and maintenance of store, rent of store, air conditioning etc / Cost of packaging orders − material, labor, overhead	Non value added as it does not contribute to revenue

Explanation of Solution

• The entire cycle of business activities from the time a customer arrives to the time the customer departs comprises of several value added and non-value added activities.

• Value added elements refer to the time taken for those activities that add quality and value to the overall production process concerning manufacture of goods. Example − Process Time.

• Process time is the time spent on actually producing the product. It refers to the time taken to convert the goods from raw materials to interim or final finished products. Activities covered here are: Looking at the menu, Waiting in line to give order, Giving the order to the attendant, Paying for the order, Order gets prepared and Order gets packaged.

• Non Value added elements refer to the time taken for those activities that do not add quality and value to the overall production process concerning manufacture of goods and that need to be eliminated to the greatest extent possible. Example - Waiting for the order to get prepared, Order gets inspected.

• However each of the elements of the Value added and Non value added activities has costs associated with it that are comprise of Variable costs, Fixed costs and Manufacturing overheads.

• The activities and associated costs are listed above and bifurcated as value added and non-value added.

Conclusion

Hence the Costs from Business activities from the time a customer arrives to the time the customer departs have been listed.

To determine

3. Introduction:

Cost Classification

• The time taken from the start of the sale process, i.e. the receipt of a confirmed sales order, to the completion of the transfer of goods or services, i.e. dispatch of goods consists of several activities and costs. Components of costs are Costs of Value added activities comprising of Variable costs and manufacturing costs and Costs of Value added activities such as fixed costs.

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced. Examples are costs of direct material and direct labor.

• Manufacturing costs are costs that are directly incurred in connection with manufacture of goods. Examples are Direct materials and Manufacturing Overhead

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced. Examples are costs of factory rent, depreciation on plant and equipment

Costs from Business activities from the time a customer arrives to the time the customer departs as Variable or Fixed

Answer to Problem 6BTN

Solution:

Activity	Costs	Variable or Fixed
Entering the store	Cost of Display, Advertising	Fixed
Looking at the menu	Cost of Menu printing	Fixed
Waiting in line to give order	Cost of Store Facilities such as Electricity, Air conditioning etc.	Fixed
Giving the order to the attendant	Cost of Attendants' salary	Fixed
Paying for the order	Cost of Electronic Banking, Capital expenses of Cash registers, payment facilities etc.	Fixed
Waiting for the order to get prepared	Cost of furniture and maintenance of store, rent of store, air conditioning etc.	Fixed
Order gets prepared	Cost of manufacturing orders − material, labor, overhead	Variable
Order gets inspected	Cost of inspecting orders − labor, overhead	Variable
Order gets Packaged	Cost of packaging orders − material, labor, overhead	Variable
Customer either eats in the outlet or takes the order as a delivery and leaves.	Cost of furniture and maintenance of store, rent of store, air conditioning etc / Cost of packaging orders − material, labor, overhead	Fixed / Variable

Explanation of Solution

• The entire cycle of business activities from the time a customer arrives to the time the customer departs comprises of several value added and non-value added activities.

• Each of the elements of the Value added and Non value added activities has costs associated with it that are comprise of Variable costs, Fixed costs and Manufacturing overheads.

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured. Fixed costs are costs that have to be borne regardless of the volume of production or goods manufactured.

• Cost of Display, Advertising and Cost of Menu printing, Cost of Store Facilities such as Electricity, Air conditioning etc., Cost of Attendants' salary Cost of Electronic Banking, Capital expenses of Cash registers, payment facilities etc. and Cost of furniture and maintenance of store, rent of store, air conditioning etc. are fixed costs since they do not vary with the volume of the orders of goods sold.

• The aforesaid costs have to be borne regardless of the volume of goods manufactured or sold and are hence classified as fixed costs.

• Cost of manufacturing orders, Cost of inspecting orders and Cost of packaging orders are variable costs that are dependent on the volume of goods sold and comprise of material, labor, and overheads.

• The aforesaid costs fluctuate depending on the volume of goods manufactured or sold and are hence classified as variable costs.

Conclusion

Hence the Costs from Business activities from the time a customer arrives to the time the customer departs as are classified as Variable or Fixed.