SECTION C CASE STUDY Aclivity-based costing: traditional costing manufacturer Total marks for this question: 20 marks (Suggested time: 35 minutes] Lakim Koto Py Lid manufactures a wide range of delicious cakes and pastries. At the annual Christmas party, the company's owner, LM, Koto treated his employees to a nostalgic review of the firm's history, he fold them Twenty years ago, we had only three product lines - ples, finger buns and famingtons. We were flat out producing large volumes of each product using very simple machinery and a lot of hard work. Myf How Times have changed! We still make and sel a lot of pies and famingfont but we also produce a wide range of low volume ines, such as Danish parties, doughnuts and vonilo sices I hear you sighing, and no wonder these low volume products are o poin in the neck. They are complex to produce and their short production runs involve a lot of extra machinery setups and material handling. Bu the occountants for me that these specially lines have wonderful profit margins so we must not complain Kato thon outined 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 moing machines and ovens that replaced a lot of the direct labour operations, and on increased emphasis on quality and delivery performances. Indeed, right across the business, more ond more effort hod been placed to keep customer hoppy. However, his speech cast a gloomy shadow across the Christmas festivities when he womed. 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 Christmas together. To survive, we must of work very hard. We must forecast on increasing sales particularly of our high morgin speciality products The company's management accountant, toni Tonne, hod become concemed about the conventional product costing system Craving for Cakes. The manufacturing people were also sure that the casting system was distorting product costs REQUIRED: 1. Describe the changes in cost structure that are likely to have occurred of Craving for Cokes over the last 20 years and explain their couses & marks 2. Do you thing that the existing costing system understates or overstates the cost of a Lomingtons b. Danish pastries Explain your answer. 5 marks Activity based costing has the potential to improve the accuracy of product costs. However, it is important for management to understand its imitations Asht Tonne identity and sufficiently opioin the tv imitations morka