International plastics is a multinational, diversified organization.One of its manufacturing divisions, Northeast Plastics, has become less profitable due to increased competition.The division produces three major lines for plastic products within its single plant.Product line A is high-volume, simple pieces produced in large batches.Product line B is medium-volume, more complex pieces.Product line C is low-volume, small order, highly complex pieces.

Currently the division allocates indirect production costs based on direct labour cost.The Vice President of manufacturing is uncomfortable using the traditional cost figures.He thinks the company Is underpricing the more complex products.He decides to conduct an ABC analysis of the business.

Interviews were conducted with the key managers in order to identify activities, resources, cost drivers and their relationships,

INTERVIEWEE : PRODUCTION MANAGER

Q1: What activities are carried out in your area?

A1: All products are manufactured using three similar, complex and expensive molding machines.Each molding machine can be used in the production of the three product lines.Each set up takes about the same time irrespective of the product

Q2: Who works in your area?

A2: Last year, we employed 30 machine operators, 2 maintenance mechanics and 2 supervisors.

Q3. How are the operators used in the molding process?

A3: It requires nine operators to support a machine during the actual production process

Q4: What do the maintenance mechanics do?

A4: They primary function is to perform machine setups.However, they are also required to provide machine maintenance during the molding process.

Q5: Where do the supervisors spend their time?

A5: They provide supervision for the machine operators and the maintenance mechanics.For the most part, the supervisors appear to spend the same amount of time with each of the employees that they supervise.

Q6: What other resources are used to support manufacturing?

A6: The molding machines use energy during the molding process and during the setups.We put meters on the molding machines to get a better understanding of their energy consumption.We discovered that for each hour that a machine ran, it used 6.3 Kilo Watts of energy.The machines also require consumable shop supplies (eg. Lubricants, hoses and so on). We have found a direct correlation between the amount of supplies used and the actual processing time.

Q7: How is the building used and what costs are associated with it?

A7: We have a 100,000 Sq.ft building.The total rent and insurance costs for the year were Rs. 675,000. These costs are allocated to production, sales and administration based on square footage.

As a Consultant appointed for introducing Activity Based costing in the organization, you are required to:

a.Identify the activities and resources for the division.For each activity, suggest an appropriate cost driver.

b.For each resource identified in (a) indicate its cost behavior with respect to the activity it supports. (assume a planning period of one month)

c.Elucidate the drawbacks of traditional costing methods and the advantage of activity-based costing over the traditional costing methods.