Reference no: EM131179486

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:

Brown's Bakery - Costs and Cost Drivers
Cost category	Cost		Cost driver
Wages	$600,000		Number of employees
Building costs	160,000		Floor space (m2)
Depreciation	200,000		Machine hours
Consumables	100,000		Orders placed by centre
Energy	800,000		Kilowatt hours used
Other	40,000		Number of employees
Total		$1,900,000

Next, Knight divides the company into the following departments:

Product Development	Baking
Sales and Dispatch	Packing and Warehousing
Mixing Batters	Administration
Filling Pies and Quiches	Corporate Management

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

Brown's Bakery Cost Driver Usage by Departments
	Cost categories (cost drivers)
Departments	Wages (employees)	Building (m2)	Depreciation (machine hours)	Consumables (orders)	Energy (kilowatt hours)	Other (employees)
Product Development	5	200	-	10	-	5
Sales and Dispatch	10	500	-	15	-	10
Mixing Batters	15	500	1 000	50	10 000	15
Filling Pies and Quiches	20	1 000	3 000	100	10 000	20
Baking	15	500	5 000	100	200 000	15
Packing and Warehousing	20	1 000	500	150	30 000	20
Administration	10	1 000	500	50	-	10
Corporate Management	5	300	-	25	-	5
Total quantity of cost drivers across all departments	100	5 000	10 000	500	250 000	100

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?