• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Activity Based Costing system

Extracts from this document...

Introduction

Question 1 Describe the changes in cost structure that are likely to have occurred at Santa Cakes Pty Ltd over the last twenty years and explain their causes. Answer: Refer to this case which the company is named Santa Cakes Pty Ltd manufactures a wide range of delicious cakes and pastries. Previously, they just have three product lines and using very simple machinery and a lot of hard work. As time goes by, the customer demands are changing, some specific products become more and more popular. But these products can not be produced in large volume. In order to produce a wide range of low volume lines as well as make and sell a lot of pies and lamingtons, they want to develop their production lines, which involve a lot of extra machinery set ups and material handling. These changes would directly lead to the changes in cost structure of the company. In the past, the cost structure of company seems very simple; absorption costing system is easy applied to this structure. It is an inventory valuation and costing model that includes all manufacturing costs. For example, one is the direct material, those materials that become an integral part of a finished product and can be conveniently traced into it. ...read more.

Middle

They adopt some computer controlled machines and replace a lot of direct labor operations. They also start to produce some specific new products, such as Danish pastries, donuts and vanilla slices. These changes bring some troubles in cost calculation. That is because the new products are very complex to produce; they can not be produce in large volume. In production process, a lot of activities are required to produce the new products, and these activities will definitely cause some costs in the process. These costs would directly lead to high production overheads. Under the existing costing system of the company, the high production overheads brought by new products would be distributed to every product equally. So the cost of old products like lamington would be calculated higher than the actual cost, and oppositely, the cost of new products like Danish pastry would be calculated lower than the actual cost. We can use a simple example to explain that. Suppose each lamington contains following costs: direct material $1, direct labor $2. The total production overheads are $2000. Under the existing costing system, based on direct material, producing 1000 lamingtons, the overhead cost per lamington should be calculated as follow: OAR = Total overhead cost / Total direct material = $2000/1000 = $2 So the total cost of each lamington is 1+2+2=$5 If the company produces 1000 Danish pastries, each Danish pastry contains following costs: direct material $1, direct labor $2, the production overheads is $4000 based on direct material. ...read more.

Conclusion

Then, as sum up, ABC doesn't eliminate or change costs, it provides data about how costs are actually consumed. In this example, if Santa Cakes Pty Ltd wanted to reduce costs using traditional data that would have to decrease salaries, or decrease costs of supplies. They don't know enough to change the equipment or overhead costs. Using ABC data you can see that it costs the same to paint and inspect the door. Absorption costing system is inaccurate in the way that they allocate costs. Large batch or high volume products and services typically incur 50-200% LESS overhead than they are assigned. Small batch or low volume products and services typically incur 200-1000% MORE overhead than they are assigned. This means that products and services that are considered highly profitable may in fact be profit eaters. This inaccuracy is becoming more and more critical as companies move toward customer-defined products and services (which often mean a batch size of one). Thereby, in order to correctly associate costs with products and services, ABC assigns cost to activities based on their use of resources. It then assigns cost to cost objects, such as products or customers, based on their use of activities. This information assists company in making decisions about pricing, outsourcing, capital expenditures and operational efficiency. Therefore it could overcome the deficiencies inherent in the existing costing system. ?? ?? ?? ?? March. 2005 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Computer Science section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Computer Science essays

  1. I have been given the task to design a database for a company called ...

    This means that the 'Welcome' menu will come up when the database in opened. Then you have to put another action in the action column, this time you have to put 'maximise', this is put here so that the form will be maximised when opened.

  2. Smart Card System

    The conversion of plaintext into ciphertext or vice versa, should be applied accompany with a cryptographic algorithm. Most encryption algorithm are based on the concept of complex mathematics that work in only one direction and are generally based on the difficulties of factoring verly large numbers ( keys)

  1. Creating a computer system for Wooten Basset Rugby Club

    allow the user to easily understand the information and be able to perform sufficient actions such as adding or deleting data. Following are the forms required by the system: 1. frmFixtures This form will deal with all the actions relating the handling of data with fixtures.

  2. Data Management: Past, Present, and Future

    These sixth generation systems are the storage engines for the emerging Internet and Intranets. 2. Historical perspective: The Six Generations of Data Management 2.0. Zeroth generation: Record Managers 4000BC -1900 The first known writing describes the royal assets and taxes in Sumeria.

  1. The Global Positioning System

    This means that, even using GPS, the user will still need a map and compass to find his way. It is possible to buy localised maps that can be downloaded into the GPS receiver, and a receiver could then tell you what road you are in, and even what number house.

  2. How audio products work.

    However, with a CD the laser starts reading the disc from the inside ring (table of contents) and ends up on the outside. When play back starts, a laser beam shines on the ridges and lands on the data membrane layer.

  1. Infernowear is a new company run by a self-employed creative designer aiming to producing ...

    of the Act This above act was taken from the data protection act; it states that security methods should be used to protect unauthorized access to personal details. As my system will be handling customer details including addresses and phone numbers it is essential that the system is password protected and secure.

  2. AS ICT Corsework - Mr Brookes K-Fit Ltd

    He's hoping to expect around 200 - 300 batch orders a week but if promoted well and products are priced correctly he can achieve way beyond that figure. Another major thing he mentioned was that it needs to be a system that the majority of people can relate to and

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work