Question

Pressed Organics is a cold pressed juice manufacturer who creates organic juices. As the budget accountant in the new processing department, you are given the task of identifying direct and indirect costs of each new cold pressing machine. Your supervisor has asked that you classify the majority of the juicer and department costs as indirect.

Classifying the majority of costs will allow you to use the direct labor based overhead allocation method. Also using this method will charge a lower amount of overhead as long as the costs are smaller direct labor costs. You have realized that classifying the majority of the costs will cause a penalty for other departments that typically have larger allocations. These same departments will have lower performance ratings as a result of the change in classification.

Questions:

1. Considering your understanding of job order costing and process costing, analyze how a hybrid costing system can yield different results when costs are classified as direct versus indirect?
2. How would you handle this situation to be sure that classifying the majority of the costs does not cause penalties for other departments?

Answer 1

Here are the four basic business models for a cold-pressed juice business:

1. Delivery Only
2. Juice Bar / Retail
3. Wholesale
4. Combination

In this article, I will give a high level overview of each business type and it’s pros and cons as I see them.

Delivery Only
This has the lowest startup cost, and is an OK place to start. Some of the most successful brands today have started this way. This business model allows you to start small. I have met several owners of successful cold-pressed juice business that started by either making juice in a rented commissary kitchen (you can usually rent by the hour), or in some cases even making juice at home and delivering your orders from there. I don’t advise starting at home, as you are probably breaking local health code laws. Nevertheless, it has been done.

You can allow customer to place orders for juices and cleanses online to be delivered the next day, or if you have your production and inventory under control, you can deliver immediately. You can build an ecommerce website very cheaply these days that can take order for juices and cleanses. If building an ecommerce website on a budget, I recommend starting with wix. The process really isn’t very complicated to get an ecommerce site up and running. You can also try to offer your products on local delivery apps like uber eats.

Other than needing juice equipment, people, and an ecommerce website, you will need to do some marketing. Facebook has amazingly targeted marketing these days, and it’s relatively cheap. You can, for example, advertise to people in your area who have “liked” photos and accounts related to health food, nutrition, and fitness. If your instagram and facebook game is on fleek you should be able to fill a decent amount of orders, as long as the competition isn’t too high in your area.