Question 1 25 marks Tum Tum Foods Ltd (TTFL) is a manufacturer of Baked Luncheon and other meat products. Recently, TTML's major high-volume selling product, Baked chicken Luncheon, has come under intense pressure from its competitor, Yum Foods Ltd (YFL). YFL uses modern manufacturing processes. TTFL's Baked chicken Luncheon sells for $10.00 per 1kg pack, based on a cost-plus pricing system. TTFL applies manufacturing overhead using a plant-wide overhead rate based on the number of direct labour hours worked. Prices are based on absorption cost plus a 40% markup. YFL sells its Baked chicken Luncheon for $8.50 per 1kg pack. The owner and manager of TTFL, Shaun Murphy, is now getting concerned about the sales of their product as the competition from YFL is fiercely tearing down their business. Murphy's elder son informs his dad about Activity based costing that he has recently learnt at the university and says that they need to relook at the costing method of their product. Murphy: If you want to work on your new costing method, go ahead. With the help of his family members, the elder son developed activity-based costing (ABC) system and identified the following bill of activities for the production: Annual volume: 10,000 1kg packs Batch size: 250 1kg packs Quantity of activity Cost per unit activity Activity driver used driver Inspect meat 30 inspections $50 per inspection Disposal of poor meat 200 kg $4 per kg Move to mincing room 80 barrow loads $8 per barrow Load mincer 40 loads $30 per load Operate mincer 5000 kg $2.50 per kg Unload mincer* 60 loads $25 per load Move to mixing room 80 barrow loads $15 per barrow Load mixer* 60 loads $20 per load Operate mixer 60 loads $40 per load Unload mixer* 60 loads $20 per load Move to packing room 80 barrow loads $10 per barrow Pack meat into skins 10000 skins $0.50 per skins Move to smokehouse 500 trolley loads S8 per trolley Move to truck 500 trolley loads $15 per trolley * These activities must be performed more than once per batch because of the limited capacity per machine. Note: The above analysis (Bill of Activities and costs) accounts for direct labour and manufacturing overhead activities Direct material cost per unit is $3.00 Required: 1. Calculate Tum Tum Foods Ltd (TTFL) cost per 1kg pack of baked luncheon under the existing absorption costing system. (3 marks) 2. Suggest three reasons why Yum Foods Ltd (YFL) may be able to sell its product at $8.50 over longer term. (3 marks) 3. Calculate the cost per unit for ITFL's luncheons using activity-based costing (7 marks) 4. What target cost would TTFL have to set for its luncheons if it wished to match the YFL's price and maintain its existing markup? (3 marks) 5. By what amount TTFL should decrease its cost to compete with YFL's price? (3 marks) 6. Identify four non-value-added activities from TTFL's bill of activities to produce luncheons. (2 marks) 7. Suggest two possible root cause cost drivers for each of the non-value added activities identified in (6) above (4 marks)
