ACB2220 Management Accounting 2021 - Semester 1 Assignment

Kidsjoy Ltd

Kidsjoy Ltd specializes in the production of robotic toys. The company started in 2012 and has performed soundly over the last ten years. However, in the past two years, the robotic toy making industry has become very competitive and in recent months, Kidsjoy Ltd has started to notice a steady decline in its monthly profit.

Mr. Smith, CFO of Kidsjoy Ltd, was particularly surprised as Kidsjoy Ltd has historically always enjoyed a sizeable share of the market in robotic toy manufacture [as highlighted in the table below] which allows the company to use a pricing strategy of marking-up their products on average 50% of the costs in the past ten years.

Last month, Mr. Smith asked you, the management accountant (who has been with the company from last year) along with the marketing team to review the current business landscape in terms of the different competitors and their products. The review reveals that Kidsjoy Ltd faces competition from five other companies which when combined are responsible for 60% of the market share. Further, the competitors similar robotic toys are on average 20% less expensive than the products Kidsjoy Ltd offers and their quality is not in any way inferior to the products that Kidsjoy Ltd manufactures. In fact, you followed up with a customer survey and the consensus from the customer sample is that Kidsjoy Ltd robotic toysare overpriced leading them to start buying from Kidsjoy Ltds competitors.

Further, you identified some of the competitors are starting to adapt new 3D printing technologies which allow them to design more customized robotic parts. The parts are more intricate, and this facilitates them to further diversify their range of products to align with customers changing taste. Further, the introduction of this new technology allows them to keep their costs low. As a result, you talked with the production team manager about the current machinery and equipment that are in use, and they conveyed to you that the machines were last updated roughly five years ago in 2016.

You conveyed your findings to Mr. Smith. After a week, Mr. Smith held a meeting with you. Mr. Smith remarked that in the past week he consulted several managers at Kidsjoy Ltd and they shared the view that the product costs are distorted. Specifically, Mr. Smith highlighted that Kidsjoy Ltds two main robotic toy lines the RoboDog and the RoboBird which share 80% of the sales of Kidsjoy Ltd are likely costed inaccurately. Further, Mr. Smith identified that more than half of the total manufacturing cost is manufacturing overhead cost.

Hence, Mr. Smith is considering the viability of replacing the current Volume Based Costing (VBC) system with the Activity Based Costing (ABC) system. Mr. Smith shows you the following VBC information that is gathered for the month of March 2021. Using the VBC

Year	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Market share in the robotic toy industry	33%	36%	39%	41%	42%	43%	42%	40%	36%	33%

1

system, Mr. Smith allocates overhead costs based on the number of robotic toys manufactured:

	RoboDog	RoboBird	Total
Number of robotic toys manufactured	2600	2000	4600
Direct Materials	126,000	96,000	222,000
Direct Labour	86,000	72,000	158,000
Manufacturing Overhead Cost Applied	221,000	170,000	391,000
Total Manufacturing Cost	433,000	$338,000	$771,000
Cost per robotic toy	$166.54	$169.00
Sales price of the robotic toy using a 50% mark-up of cost	$249.81	$253.5

In the month of March 2021, the following ABC information is gathered. The following resource-related information for ABC is collected:

Resources	$	Resource Drivers	Quantity of Resource Driver
Electricity	86,000	# Kilowatt hours (kwh)	122,857
Salaries: Employees	108,000	# Employees	30
Salaries: R&D Employees	9,000	# R&D employees	3
Moulding Machine Depreciation	150,000	# Moulding hours	15,000
Assembly Machine Depreciation	60,000	# Assembly hours	3,000
Workstations	12,000	# Workstations	6
Marketing	8,000	# Advertisements	4
	433,000

2

For each activity pool, the consumption of resources and the respective activity drivers are presented in the table below:

Activities	Resources Consumed	Activity Drivers
Research and Development	1 workstation 2000 kwh 3 R&D employees	# New functions
Setup Machines	5 workstations 2 Employees	# Machine setups
Moulding	15,000 moulding hours 88000 kwh 20 Employees	# Moulded Batches
Assembly	3000 Assembly hours 32857 kwh 2 Employees	# Robots
Advertising	4 Advertisements 6 Employees	# Advertisements

The quantity of activity drivers consumed by RoboDog and RoboBird is presented below:

Quantity of Activity Drivers	RoboDog	RoboBird	Total
Number of new functions	6	9	15
Number of machines set ups	20	16	36
Number of moulded batches	18	12	30
Number of robots	2600	2000	4600
Number of advertisements	1	3	4

3

REQUIRED

Mr. Smith strongly believes the current product costs for RoboDog and RoboBird are distorted. You are asked to prepare in a professional manner a report which includes the following three parts.

1. 1) First, using activity-based costing (ABC), you are to calculate the total product cost for RoboDog and RoboBird, respectively. You are to use the information provided and to clearly explain each step to arrive at the costs of RoboDog and RoboBird using activity- based costing (please show all workings and present clearly in table).

   [Hint: Using ABC, you are to calculate the cost per resource driver and then calculate the cost for each of the activities. Next, using ABC, calculate the cost per activity driver and then calculate the overhead allocated to each product - RoboDog and RoboBird. Finally, you will need to calculate the total cost for RoboDog and RoboBird.]

2. 2) Second, you are to provide a recommendation to Mr. Smith of whether you think Kidsjoy Ltd should implement the Activity Based Costing system. You would need to justify by explaining at least three factors that help you determine if Activity Based Costing system is appropriate or inappropriate.

   [Hint: Draw on case facts and calculations to support your answer.]

3. 3) Third, you are to suggest to Mr. Smith how Kidsjoy Ltd can remain competitive taking into consideration the costs that are calculated for RoboDog and RoboBird under ABC and the companys current pricing strategy.

   [Hint: Draw on case facts and calculations to support your answer.]