Activity-Based Costing (ABC) and lean thinking

High Power International manufacturers a range of sedan vehicles at the firms Adelaide facility. These sedans include three models: Explorer TX, Performance RX, and Extreme YZ. The firm currently uses a standard costing system in which overhead costs are allocated to these product lines based on direct labour hours. As a result of ongoing tensions regarding the reliability of product costing information given the increase in the degree of production automation, the management accounting team are currently considering a move to activity based costing. To support this switch, the management accounting team has identified a range of relevant activities and their associated costs and drivers.

The following data is provided for the year ended 30 June 2021:

Model	Explorer TX	Performance RX	Extreme YZ
Forecast Sales (Units)	1,450	925	530
Selling price per unit($)	$67,000	$94,000	$115,000
Prime Costs per unit	$19,500	$27,200	$35,100
Total DLH per Unit	10	10.5	10.75

The activity costs budgeted for overhead for the 2021 financial year and related activity cost drivers were as follow:

OH Activity	OH Cost	Cost Driver	Amount of Cost Driver
			Explorer TX	Performance RX	Extreme YZ
Set Ups	$11,984,766	Number of Set ups	32	21	12
Painting	$3,568,845	Painting hours	3,285	2,555	1,460
Laser cutting	$11,829,469	Machine Hours	3,405	2,293	1,251
Engineering support	$1,670,569	Number of call outs	8	11	8
Machining	$23,933,261	Machine Hours	2,884	2,884	2,472
Assembly	$9,606,822	Labour Hours	2,603	3,091	2,440
Packing	$3,176,698	Number of units	1,450	925	530
Inspection	$21,512,934	Inspection hours	145	111	70
Maintenance	$3,803,116	Maintenance hours	73	280	159

Required:

1. Using Excel and the current standard costing method of applying overhead using direct labour hours, develop a spreadsheet to calculate for each model the expected:
   1. Gross Profit per unit,
   2. Gross Profit margin ($GP/$Sales),
   3. Total Gross Profit per Model, and
   4. Total Firm Gross Profit.
2. Using Excel and the overhead activity and cost data provided conduct the same analysis utilising Activity Based Costing (ABC) techniques to allocate activity-based costs and again calculate for each model the expected:
   1. Gross Profit per unit,
   2. Gross Profit margin ($GP/$Sales),
   3. Total Gross Profit per Model, and
   4. Total Firm Gross Profit.
3. Compare and contrast your results (relevant comparative charts/figures developed through Excel should be included) in part a and b and discuss the underlying causes of the differences between the results under the standard costing method and ABC.
4. Following the presentation of your comparative results, the CFO argued that the use of the ABC system should be slowly phased in over a 2 year period so as to minimise staff uncertainty. Given the use of department profit results in remuneration and other staffing decisions, you asserted that it was critical that the use of ABC should be brought in as soon as possible to ensure that the firms product costing system is as reliable as possible. From an ethical perspective, is the CFOs suggestion appropriate?
5. Provide an overview and outline an example which illustrates how lean thinking principles could be applied in this situation to maximise organisational efficiency and profitability given the information supplied regarding the firms activities.