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 below. Cravings for Cakes List of activities Activity Activity cost Activity driver Annual quantity of activity driver Prepare annual accounts R50 000 None available --- Process receivables 150 000 No. of invoices 5 000 invoices Process payables 250 000 No. of purchase orders 2 500 purchase orders Program production 280000 No. of production schedules 1 000 schedules Process sales order 400 000 No. of sales orders 4 000 sales orders Dispatch sales order 300 000 No. of dispatches 2 500 dispatches Develop and test products 120 000 Assigned directly to products --- Load mixers 140 500 No. of batches 1 000 batches Operate mixers 459 000 No. of kilograms 200 000 kilograms Clean mixers 69 000 No. of batches 1 000 batches Move mixture to filling 34 500 No. of kilograms 200 000 kilograms Clean trays 200 000 No. of trays 16 000 trays Fill trays 160 000 No. of cakes/pastries 800 000 cakes/pastries Move to baking 80 000 No. of trays 16 000 trays Set up ovens 500 000 No. of batches 1 000 batches Bake cakes/pastries 1 300 000 No. of batches 1 000 batches Move to packing 400 000 No. of trays 16 000 trays Pack cakes/pastries 800 000 No. of cakes/pastries 800 000 cakes/pastries Inspect pastries 25 000 No. of pastries 50 000 pastries
Required:1. Calculate the cost per unit of activity driver for the activities listed above. (Work to four decimal places.)
2. Use the following information to prepare a bill of activities and determine the cost per unit for: a) the chocolate cake (5) b) the danish pastry (5) Chocolate cake (batch size 1 000; annual volume 100 000) 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 30 000 kg Clean mixers 100 batches Move mixture to filling 30 000 kg Clean trays 2 000 trays Fill trays 100 000 cakes Move to baking 2 000 trays Set up ovens 100 batches Bake cakes/pastries 100 batches Move to packing 2000 trays Pack cakes/pastries 100 000 cakes Dispatch sales order 500 sales orders Develop and test product R6 000 assigned directly to this product Danish Pastry (batch size 200; annual volume 10 000) Activities consumed Annual quantity of activity driver Process receivables 150 invoices Process payables 100 purchase orders Program production 50 production schedules Process sales order 100 sales orders Load mixers 50 batches Operate mixers 4 000 kg Clean mixers 50 batches Move mixture to filling 4 000 kg Clean trays 400 trays Fill trays 10 000 pastries Move to baking 400 trays Set up ovens 50 batches Bake cakes/pastries 50 batches Inspect pastries 10 000 pastries Move to packing 400 trays Pack cakes/pastries 10 000 pastries Dispatch sales order 150 sales orders Develop and test product R24 000 assigned directly to this product
3. What other costs must be added to calculate the product cost for chocolate cakes and danish pastries?
4. Why is the cost per danish pastry much higher than the cost per chocolate cake? Would this difference be reflected in the conventional costing system? Explain your answers. (5) 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, J.M. Craving, is more cautious: 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. 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 this time describe the costs of ABC and its limitations, as well as the benefits.
5. Prepare a report for Craving that outlines the benefits, costs and limitations of activitybased costing.