Aocusage Company Case Background Accusage Company manufactures a wide range of smallgoods {processed meats). Twenty years ago Accusage Company had only three product lines [Mettwurst, Bologna sausage, and Saveloys). The company produced large volumes of each product, using very simple machinery and a lot of hard work. The company still makes and sells a lot of the original three product lines, but now also produces a wide range of lowvolume speciality lines (Clobassy, Csabai, and Chorizo). The lowvolume speciality lines are complex to produce and their short production runs involve a lot of extra machinery setups and material handling. But the current gures indicate that these speciality lines have very good profit margins. The company has undergone some dramatic changes within the business over the past 20 years. The factory had seen the introduction of computercontrolled mincing and mixing machines and smoking ovens that replaced a lot of the direct labour operations, and an increased emphasis on quality and delivery performance. In fact, right across the business, more and more effort had been placed on keeping the customer happy. Despite all this progress, the company seems to be struggling. Profits are declining, and for the company to survive senior management has indicated to staff that they must be more productive. Senior management also indicated that the company must focus on increasing sales, particularly in the range of highmargin speciaity products. The company's management accountant had become concerned about the conventional product costing system at Accusage Company. The manufacturing people were also sure that the costing system was distorting product costs. 160 Move to mixing room 50 batches 161 Set up scales 5D batches 162 Weigh ingredients 5i) batches 163 Load mixers 5i) batches 164 Operate mixers 7,500 kilograms 165 Clean mixers 5i) batches 166 Move mixture to smokehouse 7,500 kilograms 167 Pack into skins 15,200 products 168 Setup smokehouse 31D trays 169 Move to smokehouse 31D trays 170 Smoke products 310 trays 171 Unload smokehouse 31D trays 172 Inspect nished products 310 trays 173 Disposal of substandard product 310 trays 174 Move to truck 300 Finished trays Direct Materials 52 per kilogram Assigned directly to 175 products 175 Current Market Selling Price $12 per unit of product 177 Batch size 300 173 Annual Volume 15,000 179 \"All Calculations to 4 declmal places REQUIRED Each student will take the role of a management accounting consultant and present a paper outlining your analysis and recommendations/conclusions related to the assignment case. The paper should be written in fluent grammatical English. The paper may take the form of a report, or an essay. However the form is irrelevant provided that the analysis and recommendations/conclusions required are clear and understandable to the assessor and are within the limits given. 2,000 words. There is no set length for the report. However a suggested length for the report would be between 1,500 and Various data and amounts will be necessary to support the analysis and recommendations/conclusions presented in the paper. Relevant schedules/tables providing the details of these data and calculations should be provided as appendices and appropriately cross-referenced in the paper. Internet resources used should be acknowledged and fully referenced. Copies of internet materials used should be submitted separately (in a single file in PDF* format) with the final paper. All references and sources must be properly acknowledged, and the paper should include a bibliography of referenced sources. A copy of the final paper should be retained by the author until after assessment of the paper has been finalised.Prepare a Written Report/Essay 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.25 26 Schedule 1 27 Resource Cost Categories and Resource Drivers 28 Cost category Cost Resource driver 29 Wages $4,275,000 Number of employees 30 Building costs $1,140,000 Floor space 31 Depreciation $760,000 Machine hours 32 Consumables $38,000 Orders placed by centre 33 Energy $159,600 Kilowatt hours used 34 Other $38,000 Number of employees 35 Total $6,410,600 36 - All Wages Costs can be considered indirect costs for the purposes of this case. 37 The current conventional approach to allocation of overheads is to use a plantwide rate. - The current plantwide rate in use can be approximated by using the estimated annual number of units produced as the level of activity. 38 39 Schedule 2 40 Resource drivers consumed by activity centres 41 Cost categories (resource drivers) Wages Building costs Depreciation Consumables Energy Other 42 Activity centres employees) (m2) (machine hours) (orders) (kilowatt hours) (employees) 43 New Product Development 2 200 0 5 10000 233 Schedulel 40 Resource drivers consumed by activity centres 41 Cost categories [resource drivers) Wages Building costs Depreciation Consumables Energy Other 42 Activity centres {employees} {"123 [machine hours) {orders} [kilowatt hours) {employees} 43 New Product Development 2 200 0 5 10000 2 44 Sales and distribution 7 400 0 10 12000 i 45 Inspecting 2 400 0 5 12000 2 46 Mincing 19 800 3000 110 150000 19 47 Mixing 19 800 3800 80 230000 19 48 Smoking and Packing 15 800 700 110 150000 15 49 Administration 7 400 0 10 10000 i 50 Corporate management 3 300 0 10 6000 3 Total quantity of resource drivers acrm all activity 51 centres 74 4,100 7500 340 500000 74 52 "All Calculations to 4 decimal places 51 Schedule 3 54 Activities and resource drivers used . Inspecting Percentage of Percentage of 55 Activity labour time Percentage of floor space orders placed 56 Inspect meat 30% 50% 0% 57 Disposal of substandard meat 10% 10% 30% Move to mincing room 10% 10% 0% 53 Schedule 3 54 Activities and resource drivers used - Inspecting Percentage of Percentage of 55 Activity labour time Percentage of floor space orders placed 56 Inspect meat 30% 50% 0% 57 Disposal of substandard meat 10% 10 30% 58 Move to mincing room 10% 10% 0% 59 Inspect finished products 30% 10% 0% 60 Disposal of substandard product 10% 10% 30% 61 Reports to Health Dept 10% 10% 40% 62 Total 100% 100% 100% 63 *All Calculations to 4 decimal places 64 There is no significant use of machinery (and therefore no depreciation) in this activity In this activity centre, consumables are used by three activities in the proportions given, and energy (kw) is consumed by all activities in the same 65 proportions to the allocated floor space. 66 67 Schedule 4 68 List of activities Annual quantity 60 Activity cost Activity driver of activity driver67 Schedule 4 68 List of activities Annual quantity 69 Activity Activity cost Activity driver of activity driver 70 Corporate management $173,311 Assigned directly to products 71 Process receivables $197,833 No. of invoices 3,800 invoices 72 Process payables $127,409 No. of purchase orders 1,900 purchase orders 73 Production planning $197,833 No. of production schedules 760 production schedules 74 Reports to Health Dept ?? No. of reports 76 reports 75 Process sales order $334,438 No. of sales orders 3,040 sales orders 76 Dispatch sales order $185,886 No. of dispatches 1,900 dispatches 77 New Product Development $115,541 Assigned directly to new products lines 78 Inspect meat ?? No. of batches 760 batches 79 Disposal of substandard meat ?? No. of batches 760 batches 80 Move to mincing room ?? No. of batches 760 batches 81 Set up mincer $121,861 No. of batches 760 batches 82 Weigh and sort ingredients $121,861 No. of batches 760 batches 83 Load mincer $956,234 No. of kilograms 152,000 kilograms 84 Operate mincer $232,600 No. of batches 760 batches 85 Unload and Clean mincer $121,861 No. of batches 760 batches86 Move to mixing room $132,983 No. of batches 750 batches 87 Set up scales $55,492 No. of batches 75D batches 88 Weigh ingredients $121,851 No. of batches 750 batches 89 Load mixers $243,722 No. of batches 750 batches 90 Operate mixers $1,144,457 No. of kilograms 152,000 kilograms 91 Clean mixers $132,983 No. of batches 75D batches 92 Move mixture to smokehouse $77,513 No. of kilograms 152,000 kilograms 93 Pack into skins $274,174 No. of products 508,000 products 94 Setup smokehouse $98,548 No. of trays 12,150 trays 95 Move to smokehouse $54,835 No. of trays 12,150 trays 96 Smoke products $572,851 No. of trays 12,150 trays 97 Unload smokehouse $54,835 No. of trays 12,150 trays 98 Inspect nished products ?? No. of trays 12,150 trays 99 Disposal of substandard product ?? No. of trays 12,151) trays 100 Move to truck $55,957 No. of trays 11,550 Finished trays 1:21 "All Calculations to 4 decimal places "??" indicates that these gures must be calculated. 1g Schedule 5 103 Met'twurs't Annual quantity 104 Activities consumed of activity driver 105 Corporate management $52,379 Agigned directly to products 102 Schedule 5 103 Mettwurst Annual quantity 104 Activities consumed of activity driver 105 Corporate management $52,379 Assigned directly to products 106 Process receivables 400 invoices 107 Process payables 200 purchase orders 108 Production planning 160 production schedules 109 Reports to Health Dept 16 reports 110 Process sales order 380 sales orders 111 Dispatch sales order 300 dispatches 112 New Product Development $0 Assigned directly to new products lines 113 Inspect meat 160 batches 114 Disposal of substandard meat 160 batches 115 Move to mincing room 160 batches 116 Set up mincer 160 batches 117 Weigh and sort ingredients 160 batches 118 Load mincer 30,500 kilograms 119 Operate mincer 160 batches 120 Unload and Clean mincer 160 batches 121 Move to mixing room 160 batches121 Move to mixing room 160 batches 122 Set up scales 160 batches 123 Weigh ingredients 160 batches 124 Load mixers 160 batches 125 Operate mixers 30,500 kilograms 126 Clean mixers 160 batches 127 Move mixture to smokehouse 30,500 kilograms 128 Pack into skins 121,600 products 129 Setup smokehouse 1,220 trays 130 Move to smokehouse 1,220 trays 131 Smoke products 1,220 trays 132 Unload smokehouse 1,220 trays 133 Inspect finished products trays 134 Disposal of substandard product trays 135 Move to truck 1,220 Finished trays Direct Materials $2 per kilogram Assigned directly to 136 products 137 Current Market Selling Price $9 per unit of product 138 Batch size 800 139 Annual Volume 122,000 140 *All Calculations to 4 decimal places141 Schedule 6 142 Csabai Annual quantity 143 Activities consumed of activity driver 144 Corporate management $6,440 Assigned directly to products 145 Process receivables 100 invoices 146 Process payables 100 purchase orders 147 Production planning 10 production schedules 148 Reports to Health Dept 5 reports 149 Process sales order 110 sales orders 150 Dispatch sales order 100 dispatches 151 New Product Development $57,911 Assigned directly to new products lines 152 Inspect meat 50 batches 153 Disposal of substandard meat 50 batches 154 Move to mincing room 50 batches 155 Set up mincer 50 batches 156 Weigh and sort ingredients 50 batches 157 Load mincer 7,500 kilograms 158 Operate mincer 50 batches 159 Unload and Clean mincer 50 batches