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cambden_cakes_case_1.pdf
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ACCT 1068 Cost Analysis and Applications
CASE STUDY : CAMBDEN CAKES
Introduction
Cambden Cakes manufactures and distributes a variety of cakes and pastry products to
supermarkets throughout Victoria, Australia. The Business’s factory is in Clayton,
Melbourne, which is close to the major distribution warehouses of its customers (i.e., Coles,
Safeway and Independent Grocers of Australia- IGA). Cambden delivers to its customers’
warehouses, from where the products are distributed to individual supermarket stores.
The current Managing Director (MD) is Chris Lee. Chris’s father, Ronald, first established a
small bakery in Prahran, Victoria in 1957. The business grew slowly but eventually the
opportunity to manufacture and distribute to other retailers led Ronald to establish a small
factory in 1985. Initially production was very labour intensive. A small range of products was
produced using very few machines. Chris made this comment on the twenty-five years of
operating the factory.
“We only had three product lines – pies, figure-buns and sponge cakes. We spent
all our time producing large volumes of each product, with very simple
machinery and a lot of hard work”.
In 2000, Chris took over from his father. He was very keen to expand the business and as a
result made a number of significant changes. He modernised the factory, purchasing new
computer controlled machines and ovens in which to produce the business’s products.
These machines and ovens were connected by conveyer belts, which moved the products
through each production activity.
As the business expanded production became even more machine-intensive, so that there
were now only 70 factory employees producing far greater volumes than twice that many
employees used to turn out. Labour now plays a very limited role in direct production.
Instead employees take on primarily a supervisory role, ensuring machines continue to
operate properly.
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Chris also realised that while overall demand for cakes and pastries had increased,
competition from boutique bakeries was reducing the demand for supermarket products. In
response to this threat, he established systems to increase product quality and delivery
performance, right across the business.
Chris also made changes to the types of products Cambden produced. While currently it still
makes and sells high-volume products such as pies and sponge cakes it now also produces a
wide range of low-volume lines, such as Danish-pastries, Donuts and Vanilla slices.
PROFIT RESULTS FOR 2015
Yesterday, Chris met with all employees to discuss profit results for 2015. Unfortunately he
had bad news to deliver as results for 2015 are disappointing. Chris spent the first ten
minutes of the meeting outlining the great changes that Cambden Cakes has made in the
last eight years.
“How things have changed since my father’s day when we only produced three
products. Now we produce such a wide range of speciality products we can
satisfy any of our customers’ demand. I know these low-volume products are a
pain in the neck to manufacture. Yes we produce relatively small quantities. They
are complex to produce and their short production runs involve a lot of extra
machinery set-ups and material handling. But our costing system tells us time
and again that these speciality lines have wonderfully high profit margins, far
better than our old product lines. This is why we should continue to focus on
these products.”
After pausing for a moment, Chris turned his attention to the business’s profit performance.
“Despite all this progress however, the company seems to be struggling, Our
profits are declining and if things do not improve over the next few months, we
may not be here this time next year. To survive, we must all redouble our efforts.
We must focus on increasing sales, especially of the high-margin specialty
products.
I have some exciting ideas of how to achieve this. For instance we could increase
advertising, and offer customers discounts on our highest margin, low volume
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speciality products. These ideas may cost us money, but our cost information
tells us, these are the products that make us the most money”
The company’s newly appointed Management Accountant, Monnie Jones, listened uneasily
to Chris’s speech. She had spent the last few days looking through the business’s costing
system and had grave concerns about the manner in which products were costed. The
Factory Manager had told her that he shared her concerns. He believed that the system
distorted the cost allocation between the high and low volume products the business
produced.
Of particular concern was the fact that the changes to the way Cambden Cakes operated
had resulted in a large increase in overhead costs, so cost allocation has become particularly
important. Both the Factory Manager and Monnie Jones questioned the use of “number of
products produced” as the allocation base (i.e. allocation is on a per unit basis) for these
overhead costs.
Monnie believes that an Activity Based Costing system may be more appropriate for
Cambden Cakes. She has reviewed the budgeted conversion costs (all costs other than
direct material) incurred over the year and compiled the following analysis.
COST SYSTEM REVIEW
As a first step, Monnie identified costs by category and recommended relevant resource
drivers. This information is contained in Table 1 below.
TABLE 1
Costs and Resource Drivers 2015
Cost Category $ Cost Resource Driver
Wages
300,000 Number of Employees
Building costs 80,000 Floor Space
Depreciation 100,000 Machine Hours
Indirect Materials 50,000 Direct Labour Hours
Energy
400,000 Kilowatt Hours Used
Other 20,000 Number of Employees
Total Conversion Costs $950,000
Next Monnie listed the responsibility centres within the company and defined the resource
usage of each centre. This information is contained in Table 2.
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TABLE 2
Resource Drivers Consumed by Responsibility Centres – 2015
Responsibility Number of Square Machine Direct Kilowatts
Centre Employees Meters Hours Labour Hours
Hours
Product development 5 200 0 10 0
Sales and Dispatch 10 500 0 15 0
Mixing 15 500 1,000 50 10,000
Filling 20 1,000 3,000 100 10,000
Baking 15 500 5,000 100 200,000
Packaging &
warehousing 20 1,000 500 150 30,000
Administration 10 1,000 500 50 0
Corporate
Management 5 300 0 25 0
Total Quantity of
Resource Driver 100 5,000 10,000 500 250,000
Monnie also produced a comprehensive list of activities performed in the business, then
identified a driver for each activity. Tables 3 and 4 provide the activity based data Monnie
has developed.
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TABLE 3
List of Activities for the Factory – 2015
Activity
$ Cost Activity Driver
Prepare Annual Accounts 5,000 None Available
Senior Management Costs 18,300 None Available
Process Receivables
15,000 # Invoices
Process Payables
15,000 # Purchase Orders
Program Production
28,000 # Production Schedules
Process Sales Orders 20,000 # Sales Orders
Dispatch Sales Orders 21,500 # Dispatches
Develop and Test Products 20,200 # New Products
Set up Scales
7,800 # Batches
Weigh Ingredients 4,100 # Batches
Load Mixtures 14,850 # Batches
Operate mixtures 47,500 # Kilograms
Clean mixtures 8,500 # Batches
Move mixtures to
Filling 4,250 # Kilograms
Clean Trays 20,000 # Trays
Add Ingredients
92,000 # Packets of Cakes /Pastries
Fill trays
16,000 # Packets of Cakes /Pastries
Move to Baking
8,000 # Trays
Set up Ovens
50,000 # Batches
Bake Cakes/Pastries 346,000 # Batches
Move to Packing
40,000 # Trays
Pack Cakes/Pastries
80,000 # Packets of Cakes /Pastries
Inspect Pastries
2,500 # Pastries
Warehousing
65,500 # Packets of Cakes /Pastries
950,000
TABLE 4
Total Activity Driver Usage – 2015
Invoices 5,000
Purchase Orders 2,500
Production Schedules 1,000
Sales Orders 4,000
Dispatches 2,500
New Products 5
Batches 1,000
Kilograms 200,000
Trays 16,000
Packets 800,000
Pastries 50,000
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Unfortunately Monnie has yet to complete Table 3. As a result the table doesn’t include
costs of the activities undertaken by the Mixing Centre. She did manage to collect some
preliminary data relating to the Mixing Centre (See Table 5 and 6), which she was going to
use to estimate costs of the Mixing Centre activities. However Table 5 is also incomplete.
TABLE 5
Mixing Centre Costs and Resource Drivers – 2015
Cost Category $ Cost Resource Driver
Wages 45,000 Number of Employees
Building Costs 8,000 Floor Space
Depreciation 10,000 Machine Hours
Indirect Materials 5,000
Direct Labour
Hours
Energy 16,000 Kilowatt Hours Used
Other 3,000 Number of Employees
Total Conversion Costs 87,000
The following activities take place within the Mixing Centre. Table 6 lists these activities and
provides estimates of each activity’s usage of Resource Drivers.
TABLE 6
Mixing Centre Activities and Resource Drivers Used – 2015
Activity Number
% of
Mixing Machine
% of
Direct Kilowatt
of Centre Hours Labour Hours
Employees Floor Hours
Space
Setup Scales 2 5 0 20 0
Weigh
Ingredients 1 5 0 10 0
Load Mixers 4 10 0 25 0
Operate Mixers 5 50 1,000 30 10,000
Clean Mixers 2 20 0 10 0
Move Mix to Fill 1 10 0 5 0
Total 15 100% 1,000 100% 10,000
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Finally Monnie defined the resources used in producing two of the products, Sponge Cakes
and Danish Pastries. This information is contained in Table 7.
TABLE 7
Resource Use (and other relevant data) by Sample Products – 2015
Activity
Sponge Danish Driver
Cake
Process Receivables 500 150 Invoices
Process Payables
200 100 Purchase Orders
Program Production
100 50 Production Schedules
Process Sales Orders 400 100 Sales Orders
Dispatch Sales Orders 500 150 Dispatches
Develop and Test Products 0.05 0.2 No. of New Products
Setup Scales
100 50 Batches
Weigh Ingredients
100 50 Batches
Load Mixers
100 50 Batches
Operate Mixers
30,000 4,000 Kilograms
Clean Mixers
100 50 Batches
Move Mixture to Filling 30,000 4,000 Kilograms
Clean Trays
2,000 400 Trays
Add Ingredients
100,000 10,000 Packets of Cakes/Pastries
Fill Trays
100,000 10,000 Packets of Cakes/Pastries
Move to Baking
2,000 400 Trays
Setup Ovens
100 50 Batches
Bake Cakes/Pastries 100 50 Batches
Move to Packing
2,000 400 Trays
Pack Cakes/Pastries
100,000 10,000 Packets of Cakes/Pastries
Inspect Pastries
0 10,000 Packets of Pastries
Warehousing
100,000 10,000 Packets of Cakes/ Pastries
Other Relevant Data
Sponge Cake Danish
Batch Size 1,000 200
Annual Volume (Packets) 100,000 10,000
Direct Materials Cost $250,000 $32,000
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After the meeting Monnie spoke to Chris Lee, explaining her concerns about the current
costing system, and outlining her new Activity Based Costing System. Although very
impressed with the initiative shown by Monnie Jones, Chris Lee is cautious about the benefit
of implementing Activity Based Costing.
“All these new-fangled systems, with fancy names. Five years ago it was JIT, or
was it MRP? Two years ago, TQM, and now it’s ABC or is it ABM? I’m not keen.
ABC sounds complex and expensive just to produce a more accurate accounting
number!”
“You need to provide me with a comparison between the existing and proposed
product costs and a convincing argument as to how that knowledge could
improve the profitability of my business or increase our Market Share. I suspect
ABC will add to the cost of the business and, despite my limited knowledge of
accounting, that sounds more like a reduction of Profit!”
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ASSESSMENT REQUIREMENTS
This assessment has four primary aims:
1. To provide you with an opportunity to develop your understanding of Activity Based
Costing;
2. To provide you with the means to further refine your analysis and problem solving
skills;
3. To provide you with an opportunity to develop team-work capabilities;
4. Provide you with an opportunity to develop your report writing skills.
5. To provide you an understanding on how accounting operating as a social practice.
You are required to continue Monnie Jone’s investigation of the product costing system at
Cambden Cakes. After your investigation you are required to write a REPORT for Chris Lee
detailing your investigation. Your report must include the following:
PART 1 (15 Marks) (1 500 words)
1. A summary of the background and main issues of the case.
2. A DETAILED explanation of the following:
a. The specific limitations you have identified with Cambden Cakes’ existing costing
system,
b. The potential consequences to Cambden Cakes of these limitations.
3. An explanation of why Activity Based Costing would be a more appropriate costing
system for Cambden Cakes, compared to its existing system.
4. A discussion of the benefits Cambden Cakes would derive from introducing an
Activity Based Costing system. In your discussion explain how Activity Based Costing
would overcome the consequences you identified in part 2. Ensure that you relate
your discussion specifically to Cambden Cakes’ particular situation. Do not simply
discuss the benefits of ABC generally.
5. Using the data provided in the case, calculate the total product costs of the two
types of cakes under;
i) Cambden Cakes’ original costing system;
ii) The revised ABC costing system.
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iii) A DETAILED explanation of why the product costs you have calculated for
each product in requirement 5- differ under; Cambden Cakes’ original
costing system;The revised ABC costing system.
6. A DETAILED explanation of the issues Cambden Cakes needs to consider to ensure a
successful implementation of the ABC system.
PART –B (15 Marks) ( 1,000 words)
For this part of the assignment, your group required to gain an access to an existing Business
(Small/Medium), agreed with your tutor and complete the following tasks:
1. Outline the business that your group selected – Objectives, market share, location,
customers, nature of competition, sales and number of employees and the product costing
system) ( Words 15%).
2. Analyse the product or service costing system of the Business ( Eg - simple or ABC or any
other methods). (Words 25%)
3. How the product or service quality is maintained – what measures are in place? (Words
15%).
4. How the inventory management system works in the business (Supply chain, local/
international/storage etc.) (Words 20%).
5. Identify and discuss the Cost Accounting system as a ‘Social Practice’ in your selected
Business. (Words 25%).
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PREPARATION OF THE REPORT
When preparing the report please note the following:
1. You MUST prepare the report in a professional format that would be suitable for presentation at a meeting of Cambden Cakes Staff. Although the preceding
points are numbered, they must NOT be regarded as a list of QUESTIONS, rather
as a guideline of minimum issues that must be addressed in your PROFESSIONAL
REPORT.
2. The RMIT Study and Learning Centre provides on-line tutorials to help students with their REPORT WRITING SKILLS. You can find these tutorials at the
following website:
http://www.dlsweb.rmit.edu.au/Isu/content/2 AssessmentTasks/02reports.htm
3. As a general guideline your report should include the following sections (Separately for Part 1 and Part 11):
Title Page
Content Page
Executive Summary:
Include a summary of results (not just contents) of your report so that the reader
would understand the key issues and findings. This is not the place to discuss the
business in detail;
Introduction
Introduce the business and provide a context/background for your report.
Provide a brief outline of the content of your report.
The Body of your Report
This section should have a number of sections, each one relating to a specific
issue you are analysing/discussing. Each section should begin with a Heading or
Subheading. These Headings or Subheadings should give the reader a specific
idea of the issue to which the section relates.
Conclusion:
Draw together your discussion into a specific and concise conclusion, so that the
reader could understand the basic issues and findings of your Report by reading
this section only.
Bibliography:
Evidence of research, (Harvard). If you are unsure about how to reference, please
view the following RMIT website:
http://www.dlsweb.rmit.edu.au/Isu/content/4_WritingSkills/05referencing.htm
Appendices: detailed calculations
Footnotes: If you have quoted or used the ideas of any text/article or other
source you must footnote this source. Otherwise your will be plagiarizing! If you
are unsure about how to footnote, please view the following RMIT website:
http://www.dlsweb.rmit.edu.au/Isu/content/4 WritingSkills/05referencing.htm
4. Marks will be deducted for poor presentation and inadequate referencing of materials used. Please note that PLAGIARISM is a serious university offence.
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Any evidence of plagiarism in this assignment will be sent to the Head, School of
Accounting. If you are unsure of the meaning of plagiarism, please read this
subject’s course guide, and/or see the course coordinator.
5. The assignment worth 30 of your total assessment and has a 2,500 (Part 1 -1500 Part 11 – 1000) word limit.
6. The Assignment due date is 7. PM (Singapore Time) on ………….. 7. You are expected to work in groups of 6 students with ALL students having joint
responsibility for every part of the assignment. No individual assignments will be
accepted.
PLEASE NOTE: IT IS STRONGLY ADVISED THAT YOU DO NOT ASSIGN THE
CALCULATIONS TO TWO OR THREE GROUP MEMBERS, AND DISCUSSION TO
THE OTHER THREE MEMBERS – THIS IS A TEAM ASSIGNMENT. IF YOU CHOOSE
TO PREPARE YOUR ASSIGNMENT IN HIS WAY YOU MUST ENSURE THAT YOUR
DISCUSSION IS BASED ON THE COSTS CALCULATED.
8. Please ensure you attach the following assessment page to the front of the assignment. This is a guideline of the attributes your tutor will be assessing.
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Marking guide
Grammar : Sense, Clarity, Spelling and Punctuation
Avoid use of first person (I, me, you, we etc.,)
Structure of Report: (Both Part 1 and 11)
Title page
Table of Contents
Executive Summary
Introduction
Main body of report – use of headings and subheadings
Conclusion
References
Appendices
Organisation : Logical and clear
Presentation : Typed, 2.5 cm margins, paragraph spacing, 12 point font
Calculations:
Other comments:
MARK
Student Names Student ID Signature*
* Your signature is formal acceptance of the standards set by the
university regarding written submissions. We would like to draw your
attention to the treatment of Plagiarism. It is the presentation of the
work, idea or creation of another person, without appropriate
referencing, as though it is one’s own. It is not limited to direct
quotes, rather substantial use. Plagiarism is not acceptable. The use of
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another’s work or ideas must be acknowledged. By all means, use
your text sources – just make sure you foot note appropriately.
