Refer to the below case study, write a report for Craving that outlines the benefits, costs and limitations of Activity- based costing.

Case Study:

Cravings for Cakes Pty Ltd manufactures a wide range of delicious cakes and pastries. At the annual end-of-year 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 products such as danish pastries, donuts and vanilla slices. I hear you sighing, and no wonder; these low-volume products 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 products have wonderful profit margins, so we must not complain.

Craving then outlined the dramatic changes that occurred within the business over the past 20 years. In the factory he had seen the introduction of computercontrolled mixing machines and ovens that replaced a lot of the direct labour operations, and an increased emphasis on quality and delivery performance. Indeed, right across the business, more and more effort has been placed on making the customer happy.

However, his speech cast a gloomy shadow across the end-of-year festivities when he warned:

Despite all this progress, 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 end-of-year celebration together. To survive we must all work very hard. We must focus on increasing sales, particularly of our high profit margin speciality products.

The company's management accountant, U.B. Bright, had become concerned about the conventional product costing system used at Cravings for Cakes. The manufacturing people were also sure that the costing system was distorting product costs.