Activity Based Costing, Calculation and analysis

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REQUIRED

Each student will take the role of a management accounting consultant and present a paper outlining your analysis and recommendations/conclusions related to the assignment case.

The paper should be written in fluent grammatical English.

The paper may take the form of a report, or an essay. However the form is irrelevant provided that the analysis and recommendations/conclusions required are clear and understandable to the assessor and are within the limits given.

There is no set length for the report. However a suggested length for the report would be between 1,500 and 2,000 words[footnoteRef:1]. [1: The length of assignment is an indication of the depth of analysis that is required. It does not include appendices, tables, illustrations or calculations. The length of the assignment is provided only as a guide and need not be adhered to exactly. The intention is that you demonstrate that sufficient analysis is undertaken, without excessive workload. You are however expected to be concise. ]

Various data and amounts will be necessary to support the analysis and recommendations/conclusions presented in the paper. Relevant schedules/tables providing the details of these data and calculations should be provided as appendices and appropriately cross-referenced in the paper.

Internet resources used should be acknowledged and fully referenced. Copies of internet materials used should be submitted separately (in a single file in PDF[footnoteRef:2] format) with the final paper. All references and sources must be properly acknowledged, and the paper should include a bibliography of referenced sources. [2: Instructions for creating PDF documents and/or combining documents of different formats are provided on the Learnline site. ]

A copy of the final paper should be retained by the author until after assessment of the paper has been finalised.

Case Background

The details of the case and relevant data are provided separately on the ACT202 Learnline site.

Note that the case details and associated data and figures will be unique to each student based on each student’s student number.

To obtain the case details and associated data and figures each student should download the MS Excel file[footnoteRef:3] from the Assessments section of the ACT202 Learnline site. When you have downloaded the workbook file, enter your student number in the field/cell indicated and the relevant case details, data and figures necessary to complete your assignment will be generated. [3: Students who are unable to open the MS Excel file should contact the lecturer for assistance. ]

You cannot use the worksheet in the file, or link to the worksheet in the file to complete your assignment.

You will need to print this worksheet and/or transcribe the data and figures manually.

However, if you print this worksheet to PDF format, you can "copy & paste" and/or "export"[footnoteRef:4] the details from the PDF document to an excel worksheet [4: After selecting the text in the PDF document, select the right-click dropdown menu options, to export the data to MS Excel. ]

Prepare a Written Report/Essay

Prepare a report on your analysis of the case. Your report should identify if there are any deficiencies inherent in the company’s existing costing system and if so explain how activity-based costing could overcome these deficiencies. If, in your analysis, you determine there are no inherent deficiencies, explain why not.

(To set your report in the appropriate business context, you should refer to the information given in the case details, the schedules provided and the outcomes of the following requirements.)

To support your report you should undertake the following (and use the outcomes in your report):

1. Assign the costs to the activity centres using the resource driver consumption patterns shown in Schedules 1 and 2.

2. Calculate the cost of each activity performed in the relevant (to your allocated case) activity cost centre, using the information provided in item 1 above and in Schedule 3

3. A list of the activities performed and their annual costs is provided in Schedule 4 (some costs will need to be calculated as indicated in item 2 above). In addition the schedule provides an activity driver for each activity and the annual quantity of each activity driver. Calculate the cost per unit of activity driver for the activities listed. (Calculate to four decimal places.)

4. Based on the information calculated in item 3 above and in Schedules 5 and 6, prepare a bill of activities and determine the cost per unit for each of the two product items identified.

5. Would the difference in costs for the two products be reflected in the conventional costing system?

6. Do you think that the existing costing system understates or overstates the cost of the two products identified in item 4 above? Explain your answers in detail with reference to your calculations.

7. Consider and describe the changes in cost structure that are likely to have occurred at the Company over the last 15 to 20 years, and speculate on their causes.

8. Now complete your analysis and prepare your report. Your report should identify if there are any deficiencies inherent in the existing costing system and if so explain (using the outcomes from items 1 to 7 above) how activity-based costing could overcome these deficiencies. If, in your analysis, you determine there are no inherent deficiencies, explain (again using the outcomes from items 1 to 7 above) why not.

Include in your discussion, what factors the management accountant should consider when deciding whether to use an Activity-based system that includes both manufacturing overhead and nonmanufacturing costs. And furthermore outline the benefits, costs and limitations of activity-based costing.

Urotech Company Case and Data Schedules

Urotech Company Case Background

Urotech Company manufactures a wide range of confectionery.

Twenty years ago Urotech Company had only three product lines (Fudge, Caramels, and Toffees).

The company produced large volumes of each product, using very simple machinery and a lot of hard work.

The company still makes and sells a lot of the original three product lines, but now also produces a wide range of low-volume speciality lines (Pastilles, Almond Nougat, and Candied Almonds). The low-volume speciality lines are complex to produce, and their short production runs involve a lot of extra machinery setups and material handling. But the current figures indicate that these speciality lines have very good profit margins.

The company has undergone some dramatic changes within the business over the past 15 years. The factory had seen the introduction of computer-controlled blending and filling machines and baking facilities that replaced a lot of the direct labour operations, and an increased emphasis on quality and delivery performance. In fact, right across the business, more and more effort had been placed on keeping the customer happy.

Despite all this progress, the company seems to be struggling. Profits are declining, and for the company to survive senior management has indicated to staff that they must be more productive. Senior management also indicated that the company must focus on increasing sales, particularly in the range of high-margin specialty products.

The company's management accountant had become concerned about the conventional product costing system at Urotech Company. The manufacturing people were also sure that the costing system was distorting product costs.

Schedule 1

Resource Cost Categories and Resource Drivers

*Cost category*	*Cost*	*Resource driver*
Wages	$6,975,000	Number of employees
Building costs	$1,860,000	Floor space
Depreciation	$1,240,000	Machine hours
Consumables	$62,000	Orders placed by centre
Energy	$260,400	Kilowatt hours used
Other	$62,000	Number of employees
Total	$10,459,400

· All Wages Costs can be considered indirect costs for the purposes of this case.

· The current conventional approach to allocation of overheads is to use a plantwide rate.

· The current plantwide rate in use can be approximated by using the estimated annual number of units produced as the level of activity.

Schedule 2

Resource drivers consumed by activity centres

Cost categories (resource drivers)

Wages

Building costs

Depreciation

Consumables

Energy

Other

Activity centres

(employees)

(m2)

(machine hours)

(orders)

(kilowatt hours)

(employees)

Product Development

300

10000

Sales and distribution

700

12000

Inspecting

700

12000

Blending

1,300

4900

190

250000

Boiling

1,300

6200

120

370000

Moulding and packaging

1,300

1200

190

250000

Administration

700

10000

Corporate management

400

10000

Total quantity of resource drivers across all activity centres

121

6,700

12300

560

924000

121

* All Calculations to 4 decimal places

Schedule 3 Activities and resource drivers used - Inspecting
*Activity*	*Percentage of labour time*	*Percentage of floor space*	*Percentage of orders placed*
Inspect ingredients	30%	50%	0%
Disposal of substandard ingredients	10%	10%	30%
Move to mixing room	10%	10%	0%
Inspect finished products	30%	10%	0%
Disposal of substandard product	10%	10%	30%
Reports to Health Dept	10%	10%	40%
Total	100%	100%	100%
* All Calculations to 4 decimal places There is no significant use of machinery (and therefore no depreciation) in this activity In this activity centre, consumables are used by three activities in the proportions given, and energy (kw) is consumed by all activities in the same proportions to the allocated floor space.

Schedule 4

List of activities

*Activity*	*Activity cost*	*Activity driver*	*Annual quantity of activity driver*
Corporate management	$345,868	Assigned directly to products
Process receivables	$358,898	No. of invoices	6,200 invoices
Process payables	$339,183	No. of purchase orders	3,100 purchase orders
Production planning	$199,164	No. of production schedules	1,240 production schedules
Reports to Health Dept	??	No. of reports	1,240 reports
Process sales order	$574,858	No. of sales orders	4,960 sales orders
Dispatch sales order	$318,462	No. of dispatches	3,100 dispatches
Product Development	$172,934	Assigned directly to new products lines
Inspect ingredients	??	No. of batches	1,240 batches
Disposal of substandard ingredients	??	No. of batches	1,240 batches
Move to mixing room	??	No. of batches	1,240 batches
Set up blender	$198,332	No. of batches	1,240 batches
Weigh and sort ingredients	$198,332	No. of batches	1,240 batches
Load blender	$1,559,248	No. of kilograms	248,000 kilograms
Operate blender	$378,618	No. of batches	1,240 batches
Unload and Clean blender	$198,332	No. of batches	1,240 batches
Move to filling room	$216,376	No. of batches	1,240 batches
Set up scales	$108,188	No. of batches	1,240 batches
Weigh ingredients	$198,332	No. of batches	1,240 batches
Load boiling vats	$396,663	No. of batches	1,240 batches
Coagulate, Drain and Scald	$1,860,570	No. of kilograms	248,000 kilograms
Drain and clean vats	$216,376	No. of batches	1,240 batches
Move to moulding room	$126,233	No. of kilograms	248,000 kilograms
Load hopper	$439,166	No. of products	992,000 products
Set up moulds and packaging	$157,622	No. of trays	19,840 trays
Move to moulder	$87,833	No. of trays	19,840 trays
Mould products and package	$1,090,798	No. of trays	19,840 trays
Unload moulder	$87,833	No. of trays	19,840 trays
Inspect finished products	??	No. of trays	19,840 trays
Disposal of substandard product	??	No. of trays	19,840 trays
Move to truck	$105,878	No. of trays	18,850 Finished trays

· All Calculations to 4 decimal places “??” indicates that these figures must be calculated.

Schedule 5

Fudge

*Activities consumed*	*Annual quantity of activity driver*
Corporate management	$93,063	Assigned directly to products
Process receivables	600	invoices	ucts lines
Process payables	200	purchase orders
Production planning	170	production schedules
Reports to Health Dept	170	reports
Process sales order	620	sales orders
Dispatch sales order	500	dispatches
Product Development	$0	Assigned directly to new prod
Inspect ingredients	170	batches
Disposal of substandard ingredients	170	batches
Move to mixing room	170	batches
Set up blender	170	batches
Weigh and sort ingredients	170	batches
Load blender	49,750	kilograms
Operate blender	170	batches
Unload and Clean blender	170	batches
Move to filling room	170	batches
Set up scales	170	batches
Weigh ingredients	170	batches
Load boiling vats	170	batches
Coagulate, Drain and Scald	49,750	kilograms
Drain and clean vats	170	batches
Move to moulding room	49,750	kilograms
Load hopper	198,400	products
Set up moulds and packaging	1,990	trays
Move to moulder	1,990	trays
Mould products and package	1,990	trays
Unload moulder	1,990	trays
Inspect finished products	-	trays
Disposal of substandard product	-	trays
Move to truck	1,990	Finished trays
Direct Materials	$2	per kilogram Assigned directly to products
Current Market Selling Price	$9	per unit of product
Batch size	1,200
Annual Volume	199,000

· All Calculations to 4 decimal places

Schedule 6 Almond Nougat
	*Annual quantity*
*Activities consumed*	*of activity driver*
Corporate management	$11,224	Assigned directly to products
Process receivables	200	invoices	ucts lines
Process payables	100	purchase orders
Production planning	60	production schedules
Reports to Health Dept	60	reports
Process sales order	190	sales orders
Dispatch sales order	100	dispatches
Product Development	$86,354	Assigned directly to new prod
Inspect ingredients	50	batches
Disposal of substandard ingredients	50	batches
Move to mixing room	50	batches
Set up blender	50	batches
Weigh and sort ingredients	50	batches
Load blender	12,000	kilograms
Operate blender	50	batches
Unload and Clean blender	50	batches
Move to filling room	50	batches
Set up scales	50	batches
Weigh ingredients	50	batches
Load boiling vats	50	batches
Coagulate, Drain and Scald	12,000	kilograms
Drain and clean vats	50	batches
Move to moulding room	12,000	kilograms
Load hopper	24,800	products
Set up moulds and packaging	500	trays
Move to moulder	500	trays
Mould products and package	500	trays
Unload moulder	500	trays
Inspect finished products	500	trays
Disposal of substandard product	500	trays
Move to truck	480	Finished trays
Direct Materials	$4	per kilogram Assigned directly to products
Current Market Selling Price	$13	per unit of product
Batch size	500
Annual Volume	24,000
* All Calculations to 4 decimal places