(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.
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Craving for cakes
List of activities
|
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 |
25000 |
No. of purchase orders |
2500 purchase orders |
|
Programme production |
28000 |
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 products |
60000 |
Assigned directly to products |
|
|
Load mixers |
14050 |
No. of batches |
1000 batches |
|
Operate mixers |
45900 |
No. of kilogrames |
200000 kilogrames |
|
Clean mixers |
6900 |
No. of batches |
1000 batches |
|
Move mixture to filling |
3450 |
No. of kilogrames |
200000 kilogrames |
|
Claen trays |
20000 |
No. of trays |
16000 trays |
|
Fill trays |
16000 |
No. of cakes/pastries |
800000 cakes/pastries |
|
Move to baking |
8000 |
No. of trays |
16000 trays |
|
Set of ovens |
50000 |
No. of batches |
1000 batches |
|
Bake cakes/pastries |
130000 |
No. of batches |
1000 batches |
|
Move to packing |
40000 |
No. of trays |
16000 trays |
|
Pack cakes/Pastries |
80000 |
No of cakes/pastries |
800000 cakes/pastries |
|
Inspect pastries |
2500 |
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)
|
Activities consumed |
Annual quantity of activity driver |
|
Process receivables |
500 invoices |
|
Process payables |
200 purchase orders |
|
Program production |
100 production schedules |
|
Process sales order |
400 sales orders |
|
Load mixers |
100 batches |
|
Operate mixers |
30000 kilograms |
|
Clean mixers |
100btches |
|
Move mixture to filling |
30000 kilograms |
|
Clean trays |
2000 trays |
|
Fill trays |
100000 cakes |
|
Move to baking |
2000 trays |
|
Set up ovens |
100 batches |
|
Bake cakes/pastries |
100 batches |
|
Move to packing |
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 consumed |
Annual quantity of activity driver |
|
Process receivables |
150invoices |
|
Process payables |
100 purchase orders |
|
Program production |
50 production schedules |
|
Process sales order |
100 sales orders |
|
Load mixers |
50 batches |
|
Operate mixers
|
4000 kilogrames
|
|
Clean mixers |
50 batches |
|
move mixers to filling |
4000kilogrames |
|
Clean trays |
400 trays |
|
Fill trays |
10 000 pastries |
|
Move to baking Set up ovens Bake cake /pastries Inspect pastries Move to packing |
400 trays 50 batches 50 batches 10 000 pastries 400 trays |
|
Pack cakes/pastries |
10000 pastries |
|
Dispatch sales order |
150 sales orders |
|
Develop and test product |
$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)
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