Acc502: Operations Management Accounting
Yum Yum Foods Led (YYFL) is a manufacturer of smoked sausages and other meat products. Recently, YYML's major high- volume selling product, Smokey lamb sausages, has come under intense pressure from its competitor, Tasty Foods Ltd (TFL). TFL uses modern manufacturing processes. YYFL's lamb sausages sells for $10.00 per 1kg pack, based on a cost plus pricing system. YYFL applies manufacturing overhead using a plant-wide overhead rate based on the number of direct labour hours worked. Prices are based on absorption cost plus a 40% markup. TFL sells its Smoked lamb sausages for $8.50 per 1kg pack. The owner and manager of YYFL, Perter Parker, is now getting concerned about the sales of their product as the competition from TFL is fiercely tearing down their business. Parker's elder son informs his dad about Activity based costing that he has recently learnt at the university, and says that they need to relook at the costing method of their product. Parker: If you want to work on your new costing method, go ahead. With the help of his family members, the elder son developed activity based costing (ABC) system and identified the following bill of activities for the production Smokey lamb sausages: Bill of Activities Annual volume: 10,000 1kg packs Batch size: 250 1kg packs Activity Quantity of activity driver used Cost per unit activity drive Inspect meat 30 inspections $50 per inspection Disposal of poor meat 200 kg $4 per kg Move to mincing room 80 barrow loads $8 per barrow Load mincer" 40 loads $30 per load Operate mincer 5000 kg $2.50 per kg Unload mincer 60 loads $25 per load Move to mixing room 80 barrow loads $15 per barrow Load mixer 60 loads $20 per load Operate mixer 60 loads $40 per load Unload mixer 60 loads $20 per load Move to packing room 80 barrow loads $10 per barrow Pack meat into skins 10000 skins 50.50 per skins Move to smokehouse 500 trolley loads 58 per trolley Move to truck 500 trolley loads $15 per trolley -These activities have to be performed more than once per batch because of the limited capacity per machine. Note: . The above analysis (Bill of Activities and costs) accounts for direct labour and manufacturing overhead activities . Direct material cost per unit is $3.00 Required 1. Calculate Yum Yum Foods Ltd (YYFL) cost per 1kg pack of sausages under the existing absorption costing system. (1 mark) 2. Suggest three reasons why Tasty Foods Ltd (TFL) may be able to sell its product at $8.50 over longer term. (1 1/2 marks) 3. Calculate the cost per unit for YYFL's sausages using activity based costing. (1 1/2 mark) 4. What target cost would YYFL have to set for its sausages if it wished to match the TFL's price and maintain its existing markup? (1 2 mark) 5. By what amount YYFL should decrease its cost in order to compete with TFL's price? (% mark)
