(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

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(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

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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