ASSIGNMENT PART 1

Brown's Bakery Pty Ltd manufactures a wide range of baked goods. At the annual end-of-year party, the company's owner, Mr. B Brown, gave his traditional end of year speech. In his speech he told his employees:

Twenty-five years ago we had three product lines - bread, meat pies, and sausage rolls. We were very busy producing large volumes of each product, using simple machinery and a lot of hard work. However, things have changed! We still make and sell a lot of bread, meat pies, and sausage rolls, but we also produce a wide range of low-volume products such as gluten free bread, vegetarian quiches and fruit tarts. These low-volume products are more complex to produce and their short production runs involve a lot of extra machinery setups and material handling. But the accountants tell me that these specialty products have wonderful profit margins, so we must not complain.

Brown then outlined the dramatic changes that occurred within the business over the past 25 years. In the factory, he had seen the introduction of computer- controlled mixing machines and ovens that replaced a lot of the direct labour operations, and an increased emphasis on quality and delivery performance. Indeed, right across the business, more and more effort has been placed on making the customer happy. However, his speech cast a shadow across the end- of-year party when he warned:

Despite all this progress, the company seems to be struggling. Our profits are declining, and if things don't improve over the next few months, this may be our last end-of-year celebration together. To survive we must all work very hard. We must focus on increasing sales, particularly of our high profit margin specialty products.

The company's management accountant, J, Knight, had become concerned about the conventional product costing system used at Brown's Bakery. The manufacturing people were also sure that the costing system was distorting product costs.

Required:

1. Describe the changes in cost structure that are likely to have occurred at Brown's Bakery over the last 25 years, and explain their causes.

2. Do you think that the existing cost system understates or overstates the cost of:
a) a meat pie?
b) a vegetarian quiche? (Explain your answers)

3. Explain how an activity-based costing system could overcome the deficiencies inherent in the existing costing system.

4. What factors should Knight consider when deciding whether to use an activity-based costing system?

Assume that J. Knight decided to implement an activity-based costing system that included all costs except direct materials. She identifies the following costs, by cost category, for the past year and selects the following cost drivers:

Next, Knight divides the company into the following departments:

The cost driver usage by each department, for the various cost categories, is set out below:

5. Construct an Excel spreadsheet to show the total cost of each department using the cost driver consumption patterns shown above. You should also show each departments' share of each cost category.

6. Why did Knight use cost categories in her analysis?

7. Explain how she would have identified the cost categories and give two examples of the costs likely to be included in each category.

8. Knight used the number of employees as the cost driver for wages. Can you suggest a more accurate basis for assigning wage costs to activity centres? Explain your answer.

9. Can you suggest a more accurate basis than machine hours for assigning depreciation costs to activity centres?