Reference no: EM13505826

Part -1:

The French pastry company makes a range of delicious cakes and pastries. Their website shows the following information about the company's history:

The business began in 1990, with three product lines - croissants, fruit tarts and eclairs. The products were very successful and we sold everything we could produce, using hard work and simple machinery.

Today, we still make and sell a lot of croissants and eclairs, but we also produce a wide range of low volume lines such as fruit danishes, snails, and friands. These products are more complicated to produce and have shorter production runs, so that there is more set-up time for the machinery and more material handling. We have introduced computerised mixing machines and ovens which have replaced a lot of direct labour in our factory, and we are focussing more on delivery and quality to meet our customers' requirements.

You have recently been hired as the management accountant for the business due to the retirement of the previous management accountant, who had been with the business since it began operations. When you look at the results, the company's profits have been declining over recent years. However, the product profitability analysis for the specialty lines on fruit danished, snails and friands shows that they are profitable. You wonder if there is a problem with the product costing system which the French pastry company is using. When you talk to the manufacturing supervisors and managers, they also believe that the product costing system is distorting the costs.

Required:

1) Using the information given above, describe the changes in cost structure which would have occurred at the company over the last 20 years, and explain their causes

2) Do you think the existing costing systems overstate or understate the cost of producing

a. Croissants

b. Snails

3) Explain how activity based costing could overcome the deficiencies in the existing costing system

4) After many meetings with manufacturing staff, you have identified the activity centres in the business, and collected information about some activity drivers. Identify the best activity (cost) driver for each activity centre, and prepare notes on why you have selected each driver to explain your choices to managers in your next meeting.

Cost Category Wages Building Costs Depreciation Consumables Energy Other Total

Cost $ 300,000 $ 80,000 $ 100,000 $ 50,000 $ 400,000 $ 20,000 $ 950,000

Cost Driver No of employees Floor space Machine hours Orders placed KwH used No of employees

		Building	Machine
Activity Centres	Employees	sqm	Hours	Orders	KwH
Product Development	5	200		10
Sales and Dispatch	10	500		15
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
Packing	20	1,000	500	150	30,000
Administration	10	1,000	500	50
Corporate Management	5	300		25
Total	100	5,000	10,000	500	250,000

5) Use activity based costing to develop the cost for each activity centre.

Part -2:

Milton and Rhodes perform consulting services for e-commerce consulting and information systems in Western Australia. The firm, which bills $125 per hour for services performed, is in a very tight local labour market and having trouble recruiting quality staff. The labour cost which Milton and Rhodes pays for its professional staff is $45 per hour. Selected information about the business is as follows:-

Billable hours to clients for the year totalled 5,000, made up of information systems services 3,100 hours and e-commerce consulting of 1,900 hours.

Administrative costs of $342,000 per year were allocated to both types of consulting services based on billable hours. Administrative costs consist of staff support $180,000, in-house computing $136,400 and miscellaneous office costs $25,600. A recent analysis of staff support costs found that there was a correlation with the number of clients served. In-house computing costs was correlated with the number of computer hours logged, and miscellaneous office costs varied with the number of client transactions.

The following table shows the number of clients, computer hours and client transactions for the e-commerce and information systems consulting services:-

Information

e-commerce systems

                                                                  consulting         consulting            Total

Number of clients	50	200	250
Number of computer hours	1,800	2.600	4.400
Number of client transactions	600	400	1.000

Required:
1. Many businesses are moving to Activity-Based Costing for improved costing accuracy as compared to conventional costing procedures. Explain why activity-based costing is considered to provide more accurate results

2. Milton and Rhodes is currently using conventional costing, and allocating total costs based on billable hours. Determine the profitability of the firm's e-commerce and information systems consulting services, expressing your answer in both dollars and % of revenue.

3. Milton and Rhodes decides to move to activity-based costing to try to better understand their results and address some of the problems they are having with staffing. Identify the key activities and activity drivers, and explain why you have chosen each driver.

4. Using your answers from 3, and activity-based costing, determine the profitability of the firm's e-commerce and information systems consulting services, expressing your answers in both dollars and % of revenue

5. One of the firm's partners does not care whether professional staff are working on e-commerce or information systems consulting. He says that many clients have come to expect the firm to provide both services, and that e-commerce and information systems consulting professionals are paid the same rate. Do you think the partner is correct, or there would a different approach increase the firm's profitability and address its staffing issues? Make recommendations to improve and grow the business and explain your answers.

Part -3:

Diamond Plating uses electroplating processes to coat products in either silver or gold, to individual customer specifications. Most of the company's work is obtained through a process of tendering, where the company submits a competitive bid (quote). Over the last few months, Diamond Plating has been very quiet as many of its tender bids have been unsuccessful. The Managing Director, Susan Sharma, is concerned that the business may not be able to continue operating if it does not improve its success rate with tenders.

The company has 2 production departments, Preparation and Coating, and the production requirements for different jobs can vary significantly. Some jobs require extensive preparation, and minimal coating, others require little preparation but multiple coats.

The following table describes the results of the five bids that the company submitted last month. The numbers in brackets after losses show where the company was ranked in the bid process. 

Job no	Direct labour hours in Preparation	Direct labour hours in Coating	Estimated Direct labour hours	Overhead cost of bid	Won/Lost
1	12,000	3,000	15,000	41,250	Lost (5th)
2	3,000	12,000	15,000	41,250	Won
3	15,000		15,000	41,250	Lost (3rd)
4		15,000	15,000	41,250	Won
5	7,500	7,500	15,000	41,250	Lost (2nd)

The pattern shown in the above table has been the same for the past months.

The company uses a predetermined overhead rate based on practical capacity, which is measured in Direct Labour hours.

The budgeted overhead for the year for the Preparation department is $540,000 (of which $180,000 is fixed and $360,000 variable) and for the Coating Department it is $1,440,000 (of which $360,000 is fixed and $1,080,000. Each department has a monthly practical capacity of 30,000 direct labour hours.

Required:

1. Write a report to Susan Sharma identifying the reasons why the company has been losing bids to its competitors

2. Develop an alternative costing system to use for bids to overcome this problem. Support your analysis with a detailed comparison of the existing and proposed bidding systems.

Part -4:

Far East Adventure Holidays offers a variety of holiday packages aimed at families, seniors and corporate groups. The Financial Controller Amy Wu is preparing for the annual Board meeting, and is concerned about the loss the business has made in the last year. She has examined the profits for each of the three departments of the business - family, seniors and corporate - and it seems that corporate is the source of the problem.

Amy has asked for your assistance to look more closely at the three packages offered by the corporate department, to see which packages are making profits and which are not. The three packages are to Sri Lanka, Singapore and Cambodia. The sales and direct costs for each corporate package over the last year was as follows:-

	Sri Lanka Adventure	Singapore Discovery	Cambodia Explorer
Number of packages sold	10	20	10
Number of people per package	5	6	8
Revenue per person	$         18,000	$   12,000	$  14,000
Direct Cost per package:
Tour Leader	$           5,000	$   12,000	$    9,000
Tour Assistant	$           2,000	$     3,000	$    6,000
Air Travel	$         28,000	$   30,000	$  32,000
Accommodation	$         15,000	$   26,000	$  24,000
Equipment Hire	$           4,000		$    9,000
Meals	$         18,000	$   15,000	$    8,000

The profit of each package is calculated by allocating a proportion of the overhead costs of running the corporate department, based on the proportion of actual sales revenue. For last year these overhead costs were as follows:-

Salaries 200,000 
Phone 2,000 
Depreciation on Equipment 5,000 
Utilities 2,000 
Rent and Taxes 9,000 
Other department costs 12,000 
Total Corporate Dept 230,000

Required:

1. Calculate the profit per package and the total profitability of each of the three corporate packages

2. Compare the profitability of the three corporate packages

3. Do you believe that the allocation of department overhead to packages based on actual sales revenue is appropriate? Can you suggest a better method?

4. Use your method in part 3 to develop an alternative report on the profitability of each package for the year.

5. Based on your answer to 4, identify the actions Fast East Adventure Holidays should take to improve profitability