(Appendix) Assigning activity costs to products: benefits, costs and limitations of ABC: manufacturer After much hard work, U.B Bright produces a list of the activities performed at Cravings for cakes and their annual costs. In addition ,Bright identifi

(Appendix) Assigning activity costs to products: benefits, costs and limitations of ABC: manufacturer

 

After much hard work, U.B Bright produces a list of the activities performed at Cravings for cakes and their annual costs. In addition ,Bright identifies an activity driver for each activity  and the annual quantity of each activity driver. A partial list of activity costs and quantities of activity drivers is shown overleaf.

 

Craving for cakes

List of activities

 

0

s

 

0 kilogrames

No. of batches1000 batches

No. of kilogrames

200000 kilogrames

20000

trays

16000

0 cakes/pastries

8000No. of trays

No. of batches1000 batches

No. of batches1000 batches

40000No. of trays16000 trays

80000

2500

Activity	Activity cost($)	Activity driver			Annual quantity of activity driver
Prepare annual accounts	5000	None available
		Process receivables	15000	No. of invoices	5000 invoices
		Process payables		2500	No. of purchase orders	2500 purchase orders
Programme production	2	8000	No. of productions schedules	1000 schedules
		Process sales order		40000	No. of sales orders	4000 sales orders
	Dispatch sales order	30 000	No. of dispatches	2500 dispatches
	Develop and test product	60000	Assigned directly to products
		Load mixers	14050				No. of batches				1000 batches
	Operate mixers	45900		No. of kilogrames			20000
		Clean mixers	6900
	Move mixture to filling	3450
Claen trays			No. of trays		16000
		Fill trays	No. of cakes/pastries		80000
	Move to baking		16000 trays
Set of ovens	50000
	Bake cakes/pastries	130000
	Move to packing
Pack cakes/Pastries	No of cakes/pastries	800000 cakes/pastries
Inspect pastries	No of pastries	50 000 pastries

  

Required:

1. Construct an Excel spreadsheet to:

(a) Calculate the cost per unit of activity driver for the activities previously listed.(work to four decimal places)(10 marks)

(b) Based on the information in the following table, prepare a bill of activities and determine the cost per unit for:(10 marks)

(i) Lamington.

(ii) Danish pastry

 

Lamington (batch size 1000:annual volume 100000)

 

Annual quantity of activity driver

Process receivables

Process payables

Process sales order

Load mixers

Operate mixers

Clean mixers

Move mixture to filling30000 kilogramsFill trays

Move to baking2000 trays

100 batches

Bake cakes/pastries100 batchesMove to packing

	Activities consumed
500 invoices
200 purchase orders
	Program production	100 production schedules
400 sales orders
		100 batches
	30000 kilograms
100btches
	Clean trays		2000 trays
100000 cakes
Set up ovens
2000 packing
	Pack cakes/pastries	100000cakes
Dispatch sales orders	500 sales orders
Develop  and test product	$600 assigned directly to this product.

      

Danish pastry(batch size 200:annual volume 10000)

Activities consumedAnnual quantity of activity driver

Process receivables

Process payables

Program production

Process sales order

Load mixers

Clean mixers50 batchesClean trays

Fill trays

Pack cakes/pastries

Dispatch sales order

Develop and test product

150invoices
100 purchase orders
50 production schedules
100 sales orders
	50 batches
Operate mixers	4000 kilogrames
move mixers to filling	4000kilogrames
400 trays
10 000 pastries
Move to bakingSet up ovens Bake cake /pastries Inspect pastriesMove to packing	400 trays50 batches50 batches10 000 pastries400 trays
10000 pastries
150 sales orders
$2 400 assigned directly to product

 

2. What other costs must be added to calculate the product cost for lamingtons and Danish pastries? (5 marks)

3. Why is the cost per Danish pastry much higher than the cost per lamington? Would this difference be reflected in the conventional costing system? Explain your answers. (5 marks)

4. U.B. bright, as management accountant for Cravings for Cakes Pty Ltd, has recommended the introduction of an activity based costing system to improve the accuracy of the company’s product costs. Bright is filled with enthusiasm, but the company’s owner, I.M. craving, is more cautious:

All these new- fangled system, with fancy names, Twenty years ago it was JIT, or was it ERP? Ten years ago, TQM, and now it’s ABC or is it ABM? I’m not keen-ABC but it can’t be all complex and expensive. Your report outlines the benefits of ABC but it can’t be all positive. I know every cloud has a silver lining, but I also know every silver lining has a cloud. Rewrite your report-but these times describe the costs of ABC and its limitations, as well as the benefits.

Prepare a report for Craving that outlines the benefits, cost and limitation of activity- based costing. (10 marks)