(38.45 L034 8.2 8.3 8.4 8.5 8.6 Actlvlty-based costing; traditional costing: manufacturer Cravings for Cakes Pty Ltd manufactures a wide range of delicious cakes and pastries. At the annual Christmas party, the company's owner, l.lvl. Craving, treated his employees to a nostalgic review of the firm's history. He told them: Twenty years ago we had only three product linespies, ringer nuns and iomingtons. We were at out producing large voiumes of each product, using very simple machinery and 0 tot of hard wont. My, how things have changed! We stilt make and set! a lot of pies and iamingtons. but we criso produce a wide range of iow-voiume tines. such as Danish pastries. doughnuts and vaniiia siices. i hear you signing, and no wonder; these towvolume products are a pain in the neck. They are compie);r to produce and their short production runs invotve 0 tor of extra machinery setups and material handling. But the accountants teii me that these speciaiity tines have wonderfui profit margins. so we must not complain. Craving 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 tot 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 ail this progress. the company seems to be struggling. Our prots are deciining, and if things don't improve over the next few months, this may be our test Christmas together. To survwe we must ahr work very hard. We must focus on increasing sates, particularly of our high-margin speciaiity products. The company's management accountant, Ursula B. Bright, had become concerned about the conventional product costing system at Cravings for Cakes. 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 Cravings for Cakes 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. Explain how activity-based costing could overcome the deciencies Inherent in the existing costing system. 4. What factors should LLB. Bright consider when deciding whether to use: (a) a simple activity-based costing system to assign manufacturing overhead to products (b) an activitybased system that Includes both manufacturing overhead and nonmanufacturing costs {c} a comprehensive activitybased system that includes all productrelated costs except direct material