Becko Ltd has a production department that has four major activities: receiving deliveries, handling material, production runs and quality tests.

Each of these activities has an identifiable cost driver which is given below as well the estimated volumes for the coming budgetary period.

Number of deliveries	140
Number of movements of material	320
Number of production runs	720
Number of quality tests	360

Two other activities in the department are administration and supervision. These two activities, while necessary, are non-volume related i.e. they should be regarded as fixed costs.

Budgeted costs for the coming period are given below:

	Total	Charged to
	000	000
Management salary	40	Administration: 10; Supervision: 30
Basic wages	20	Receiving deliveries: 5; Material handling: 5; Production runs: 4; Quality tests: 4; Administration: 2
Overtime	10	Receiving deliveries: 4; Production runs: 5; Quality tests: 1
Factory overheads	8	Receiving deliveries: 2; Production runs: 3; Quality tests: 1; Administration: 1.5; Supervision: 0.5
Other costs	2	Receiving deliveries: 0.5; Administration: 1; Supervision: 0.5
	80

Becko Ltd have only recently started using activity based budgeting to set the budget for the production department, and several of the staff are still unconvinced about the value of ABB over the approach they used to employ. Until recently, the production department set a traditional annual budget that used figures from the previous year as a starting point. Becko Ltd is increasingly conscious that they need to run a more flexible organisation in response to a more volatile business environment.

a.Using a table similar to (See Below) Table 5.1 in Unit 2 Session 5, produce an activity based budget (ABB) for the coming period that shows:

• i. total cost for each activity
• ii.total cost for the production department
• iii.cost per activity unit.

b.Write a persuasive note convincing all production department staff at Becko Ltd of the value of ABB over their traditional method of setting a budget. As part of your answer you need to specifically refer to your table in (a) above to reinforce your argument.

Note: Example of Table 5.1 (ignore the values)

Total Costs related Costs related to work-in- to final goods progress inspections inspections Costs Running related to costs attending seminars Cost 000 000 000 000 000 50 20 16 6 8 Salary - manager 70 35 25 8 2 Salary - inspectors 20 8 7 1 4 Salary - administrator Consumables 4 1 1 1 1 6 2 1 1 2 IT and related costs Other costs 6 09 2 1 1 2 156 68 51 18 19 200 100 25 Activity volumes 340 510 720 Cost per cost driver