Costs and limitations of ABC: manufacture
(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 ,Brightidentifi
(Appendix) Assigning activity costs to products: benefits, costs and limitations of ABC: manufacture
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
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)
…………………………….Answer preview…………………………….
Question 3
The product cost differ because the used different quintiles. That is why it was not possible for them to be priced the same though they are similar in nature. This would reflect in the activity based costing due to the overheads being different ……………………………..
APA
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