Case Study

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Contents Page

Page

1Executive Summary5

2Introduction6

3Current Costing System7
3.1 Limitations7
3.2 Potential Consequences8

4Activity Based Costing System9
4.1 Appropriate Approach9
4.2 Overcome Consequences10

5Tables 5 and 311

6Analysis12
6.1 Current Costing System12
6.2 Activity Based Costing System12
6.3 Differences in Total Product Costs13

7Recommendation14

8Conclusion15

9Appendices16
Appendix A: Calculations for Table 516
Appendix B: Calculations for Table 317
Appendix C: Calculations for Current Costing System18 Appendix D: Calculations for Activity Based Costing System19

1. EXECUTIVE SUMMARY

Over the decades, Cambden Cakes had grown and expanded such that the production process had changed from a very labour intensive factory to a machine intensive factory.

As the main purpose of production costing system was to facilitate decision making and consider how Cambden Cakes had changed, it was observed that the current costing system might not be a suitable costing system.

The objective of the report is to emphasize the proposed Activity Based Costing (ABC) system will be a more appropriate costing system for Cambden Cakes as compared to its existing costing system.

In summary, the report has determined that the current costing system distorts the production costs between high and low volume products that the business produced significantly. In contrast, ABC system provides much more accurate costing information which will consequently enable the management to make the apposite decision.

2. INTRODUCTION

Cambden Cakes was a very well known manufacturer and distributor in the cake and pastry industries throughout Victoria, Australia. Cambden Cakes was a family business that has been bequeath through the generations since 1957. Due to the growth and expansion of Cambden Cakes, the production process had changed from a very labour intensive factory to a machine intensive factory.

Unlike the early days, the current factory had very limited role for labour in direct production. Its employees mainly took on primarily a supervisory role to ensure that the machines continue to operate properly.

In response to the competitive market, Cambden Cakes now produced a wide range of low volume products such as danish-pastries, donuts and vanilla slices instead of only producing high volume products such as pies, fingerbuns and sponge cakes.

However, upon 2010 profit result meeting, it was brought to attention that the result was rather disappointing. Based on the current costing system where the number of products produced was used as the allocation base, there was a large increase in overhead costs. A decision had been made upon the information that new products are more lucrative.

The Management Accountant realised the slip-up and the possible cost distortion from the current costing system. She raised her concern and proposed a new costing system known as the Activity Based Costing (ABC) system. A detailed investigation specifying the outcome of the inquiry had been compiled and comparison had been made between the current costing system and the ABC system.

3. CURRENT COSTING SYSTEM

1. Limitations

Cambden Cakes’ current costing system used the number of products produced as the allocation base for the large overhead costs. The current costing system could be simply thought as an averaging approach where it allocated the overhead costs based on the number of products produced instead of the activity drivers that caused the indirect costs.

Due to the simplicity of cost allocation, some costs might have been allocated wrongly which might result in a distorted or inaccurate cost (i.e. the high volume products were over-costed and the low volume...
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