Cravings for cakes Pty Ltd manufactures a wide range of delicious cakes and patries. at the annual christmas party, the company's owner I.M.Craving treated his employees to a nostalgic review of the firm's history. he told them:

twenty years ago we had only three product line-pies, finger buns and Lamingtons. we were flat out producing large volume of each product, using very simple machinery and a lot of hard work. my how things have changed! we still make and sell a lot of pies and Langmintons but we also produce a wide range of low volume lines such as Danish Pastries donuts and vanilla slides. I hear you sighing, and no wonder these low volume products are a pain in the neck. they are complex to produce and their short production runs involve a lot of extra machinery setups and material handling. but the accountants tell me that these speciality lines have wonderful profit margins so must not complain.

craving then outlined the dramatic changes that had occurred within the business over that past 20 years. in the factory he had seen the introduction of computer-controlled mixing machines and ovens that replaced a lot of the direct labour operations and an increases emphasis on quality and delivery performance. Indeed, right cross the business, more and more effort had been placed on keeping the customer happy.

however, his speech cast a gloomy shadow across the Christmas festivities when he warned: despite all this progress , the company seems to be struggling. our profits are declining, and if things dont improve over the next few months, this may be our last christmas together. to survive we must all work very hard. we must focus on increasing sales, particularly of our high-margin specialty products.

the company 's management accountant , Ursula B. Bright, had become concerned about the conventional product costing system at cravings for cakes. the manufacturing people were also sure that the costing system was distorting product costs.

Describe the changes in cost structure that are likely to have occurred in Cravings for Cakes over the last 20 years, and explain their causes.

Do you think that the existing costing system understates or overstates the cost of:

(a)Lamington?

(b)Danish pastry

Explain your answer.

Explain how activity-based costing could overcome the deficiencies inherent in the existing costing system of Cravings for Cakes. Provide examples using Cravings product line information.

Develop a detail plan of implementing ABC in Cravings for Cakes. Use the 'seven-step' guideline for ABC system provided on page 320. While developing the plan use Figure 8.3 on page 331 and Figure 8.5 on page 333 for analysing the difference between Cravings for Cakes' current indirect costs allocation process and the future ABC allocation process. While developing the ABC implementation plan, please make assumptions on 'activities' and activity cost drivers relevant to Cravings for Cakes' product lines and production process.

Relevant readings:

1.Textbook Chapter 5, 6, and 8