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Activity Based Costing

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Craving for the cakes Pty Ltd manufactures a wide range of delicious cakes and pastries .at the annual Christmas party, the company’s owner I.M Craving, treated his employees to a nostalgic review of the firm’s history. He told them; Twenty years ago we had only three product lines –pies, finger buns and lamingtons .we are flat out producing large volumes of each product, using very simple machinery and lot of hard work. My, how things have changed we still make and sell a lot of pies and lamingtons, but we also produce wide range of low volume lines, such as Danish pastries, donuts and vanilla slices. I hear you singing, and no wonder; these low volume products are pain in neck. They are complex to produce and their short production run involve a lot of extra machinery setups and material handling, but the accountants tell me that these speciality lines have wonderful profit margins so we must not complain. Craving then outlined the dramatic changes that had occurred within the business over the past 20 years in the factory he had seen the introduction of computer controlled mixing machines and ovens that replaced a lot of the direct labour operation ,and an increased emphasis on the quality and delivery performance .indeed ,right across the business ,more and more effort had been placed on keeping the customer happy. However, his speech cast a gloomy shadow across the Christmas festival when he warned: Despite all this progress, the company seems to be struggling .our profit are declining, and if things don’t improve over few months, this may be ourlast Christmas together. To survive We must all work very hard, we must focus on increasing sales, particularly of our high- margin speciality product The company’s management accountant, Ursula .B. Bright, had become concerned about the conventional product costing system at craving for cakes .The manufactures people were also sure that the costing system was distorting product costs. REQUIRED: 1) Describe the changes in the cost structure that are likely to have occurred at the craving for cakes over the last 20 years, and explain their causes. 2) Do you think that the existing costing system understates or overstates the cost of the a) Lamington? b) Danish pastry? Explain your answer 3) Explain how activity –based- costing could overcome the differences inherent in the existing costing system. 4) What factors should U.B.bright consider when deciding whether to use: a) Simple activity based costing system to assign manufacturing overhead to products ? b)Activity –based system that includes both manufacturing overhead and non- manufacturing cost?