Cravings for Cakes Pty Ltd manufactures a wide range of delicious cakes and pastries. 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 lines-pies, finger buns and lamingtons. We were flat out producing large volumes 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 lamingtons, but we also produce a wide range of low-volume lines, such as Danish pastries, donuts and vanilla slices. 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 specialty lines have wonderful profit margins, so we must not complain.

Craving then outlined the dramatic changes that had occurred within the business over the past 20 years. In the factory he had seen the introduction of computer-controlled mixing machines and ovens that replaced a lot of direct labour operations, and an increased emphasis on quality and delivery performance. Indeed, right across 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 process, the company seems to be struggling. Our profits are declining, and if things don't 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

Question

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.