ACCT204 Management Accounting

Assessment Task 2  Individual Case Study

Length and/or format: Maximum 1,500 words (excluding calculations)

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PART 1 -CASE STUDY

Creamy Creations Pty Ltd manufactures a wide range of delicious cakes and pastries. At the annual Christmas party, the company’s Chairman, Robert Cole, treated his employees to a nostalgic review of the firm’s history. He told them:

Twenty years ago we had only three product lines—pies, finger buns and lamingtons. We were flat out producing large volumes of each product, using very simple machinery and a lot of hard work.

Oh My! How Things Have Changed! We still make and sell a lot of pies and lamingtons, but we also produce a wide range of low-volume lines, such as Danish pastries, doughnuts and vanilla slices. I hear you sighing, and no wonder; these low-volume products are a pain in the neck. They are 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 speciality lines have wonderful profit margins, so we must not complain.

Robert then outlined the dramatic changes that had occurred within the business over the past 20 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 had been placed on keeping the customer happy.

However, his speech cast a gloomy shadow across the Christmas festivities 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 Christmas together. To survive we must all work very hard. We must focus on increasing sales, particularly of our high-margin speciality products.

The company’s management accountant, Pamela Lou, had become concerned about the conventional product costing system at Creamy Creations. 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 Creamy Creations Pty Limited over the last 20 years and explain their causes.

2. Do you think that the existing costing system understates or overstates the cost of:

(a) Lamingtons (b) Danish pastries? Explain your answers.

3. Pamela Lou, the management accountant for Creamy Creations Pty Limited has recommended the introduction of an activity-based costing system to improve the accuracy of the company’s product costs. Pamela is filled with enthusiasm, but the company’s Chairman, Robert Cole is more cautious. Prepare a report for Robert Cole that outlines the benefits, costs and limitations of activity-based costing. (To set your report in the appropriate business context, you should refer to the information given above).

PART 2-CALCULATION

Earnest Cabinet Company Ltd designs and builds upscale kitchen cabinets for luxury homes. Many of the kitchen cabinet and counter arrangements are customer made, but occasionally the entity does mass production on order. Its budgeted manufacturing overhead costs for the year 2020 are as follows:

Overhead cost pools Budgeted overhead

Purchasing $ 114 400

Handling materials $ 164 320

Production (cutting, milling, finishing) $ 400 000

Setting up machines $ 174 480

Inspecting $ 184 800

Inventory control (raw materials and finished goods) $ 252 000

Power $ 360 000

Total budgeted overhead costs $1 650 000

For the last 3 years, Earnest Cabinet Company Ltd has been charging overhead to products on the basis of machine hours. For the year 2020, 100 000 machine hours are budgeted.

Ron Adams, Managing Director of Earnest Cabinet, recently directed his accountant, John Clarke, to implement the activity-based costing system he has repeatedly proposed. At Ron’s request, John and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools:

Overhead cost pools Activity cost drivers	Total drivers
Purchasing Number of orders	650
Handling materials Number of moves	8 000
Production (cutting, milling, finishing) Direct labour hours	100 000
Setting up machines Number of set-ups	1 200
Inspecting Number of inspections	6 000
Inventory control (raw materials and finished goods) Number of components	36 000
Power Square metres occupied	90 000

Larry Smith, sales manager, has received an order for 50 kitchen cabinet arrangements from Metro Builders Pty Limited. At Larry’s request, John prepares cost estimates for producing components for 50 cabinet arrangements so Larry can submit a contract price per kitchen arrangement to Metro Builders Pty Limited. He accumulates the following data for the production of 50 kitchen cabinet arrangements.

Direct materials	$180 000
Direct labour	$200 000
Machine hours	15 000
Direct labour hours	12 000
Number of purchase orders	50
Number of material moves	800
Number of machine set-ups	100
Number of inspections	450
Number of components (cabinets and accessories)	3 000
Number of square metres occupied	8 000

Required

1. Calculate the predetermined overhead rate using traditional costing with machine hours as the basis. (Round to the nearest cent.)
2. What is the manufacturing cost per complete kitchen arrangement under traditional costing?

3. What is the manufacturing cost per kitchen arrangement under the proposed activitybased costing? (Prepare all of the necessary schedules.)
4. Which of the two costing systems is preferable in pricing decisions? Explain.