Prepare a report on your analysis of the case. Your report should identify if there are any deficiencies inherent in the company’s existing costing system and if so explain how activity-based costing could overcome these deficiencies. If, in your analysis, you determine there are no inherent deficiencies, explain why not. (To set your report in the appropriate business context, you should refer to the information given in the case details, the schedules provided and the outcomes of the following requirements.)
To support your report you should undertake the following (and use the outcomes in your report):
1. Assign the costs to the activity centres using the resource driver consumption patterns shown in Schedules 1 and 2.
2. Calculate the cost of each activity performed in the relevant (to your allocated case) activity cost centre,using the information provided in item 1 above and in Schedule 3
3. A list of the activities performed and their annual costs is provided in Schedule 4 (some costs will need to be calculated as indicated in item 2 above). In addition the schedule provides an activity driver for each activity and the annual quantity of each activity driver. Calculate the cost per unit of activity driver for the activities listed. (Calculate to four decimal places.)
4. Based on the information calculated in item 3 above and in Schedules 5 and 6, prepare a bill of activities and determine the cost per unit for each of the two product items identified.
5. Would the difference in costs for the two products be reflected in the conventional costing system
6. Do you think that the existing costing system understates or overstates the cost of the two products identified in item 4 above Explain your answers in detail with reference to your calculations.
7. Consider and describe the changes in cost structure that are likely to have occurred at the Company over the last 15 to 20 years, and speculate on their causes.
8. Now complete your analysis and prepare your report. Your report should identify if there are any deficiencies inherent in the existing costing system and if so explain (using the outcomes from items 1 to
7 above) how activity-based costing could overcome these deficiencies. If, in your analysis, you determine there are no inherent deficiencies, explain (again using the outcomes from items 1 to 7 above) why not.
9. Include in your discussion, what factors the management accountant should consider when deciding whether to use an Activity-based system that includes both manufacturing overhead and non-manufacturing costs. And furthermore outline the benefits, costs and limitations of activity-based costing.