To analysis if there are any deficiencies inherent in the company's existing costing system and explain how activity-based costing could overcome these deficiencies. Please answer the below questions:
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Assign the costs to the activity centres using the resource driver consumption patterns shown in Schedules 1 and 2.
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Calculate the cost of each activity performed in the relevant (to your allocated case) activity cost
centre, using the information provided in item 1 above and in Schedule 3
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A list of the activities performed and their annual costs is provided in Schedule 4 (some costs will
need to be calculated as indicated in item 2 above). In addition the schedule provides an activity driver for each activity and the annual quantity of each activity driver. Calculate the cost per unit of activity driver for the activities listed. (Calculate to four decimal places.)
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Based on the information calculated in item 3 above and in Schedules 5 and 6, prepare a bill of activities and determine the cost per unit for each of the two product items identified.
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Would the difference in costs for the two products be reflected in the conventional costing system?
Digitalgen Company Case and Data Schedules Digitalgen Company Case Background Digitalgen Company manufactures a wide range of confectionery. Twenty years ago Digitalgen Company had only three product lines (Fudge, Caramels, and Toffees) The company produced large volumes of each product, using very simple machinery and a lot of hard work The company still makes and sells a lot of the original three product lines, but now also produces a wide range of low-volume speciality lines (Pastilles, Almond Nougat, and Candied Almonds) The low-volume speciality ines are complex to produce and their short production runs involve a lot of extra machinery setups and material handling. But the current figures indicate that these speciality lines have very good profit margins The company has undergone some dramatic changes within the business over the past 15 years. The factory had seen the introduction of computer-controliled blending and tilling machines and baking facilities that replaced a lot of the direct labour operations, and an increased emphasis on quality and delivery performance. In fact, right across the business, more and more effort had been placed on keeping the customer happy. Despite all this progress, the company seems to be struggling. Profits are declining, and for the company to survive senior management has indicated to staff that they must be more productive Senior management also indicated that the company must focus on increasing sales, particularly in the range of high-margin specialty products. The company's management accountant had become concemed about the conventional product costing system at Digitalgen Company. The manufacturing people were also sure that the costing system was distorting product costs. Schedule 1 Resource Cost Categories and Resource Drivers Cost ca Cost Resource driver 50 Number of $1,935,000 Floor Building costs 1290,000 Machine hours $64,500 Orders $270,900 Kilowatt hours used $64,500 Number of Total $10,881,150 All Wages Costs can be considered indirect costs for the purposes of this case. The current conventional approach to allocation of overheads is to use a plantwide rate. The current plantwide rate in use can be approximated by using the estimated annual number of units produced as the level of activity. Schedule 2 Resource drivers consumed Ener chine hours Product 300 10 Sales and distribution 12 700 10 12000 700 12000 Blendin 5100 190 32 130 1200 190 Administration 12 700 20 10000 Total quantity of resource drivers across all 124 700 12700 570 974000 124 AlUl Calculations to 4 decimal places Schedule 3 Activities and resource drivers used B labour time Percentage of floor machine hours 10% 10% h and sort ingredients 70% 10% Unload and Clean Move to 10% Total 100% Al Calculations to 4 decimal places In this Activity Centre, the only activity that makes significant use of machinery and therefore depreciation, consumables and energy) is Operate blender Various consumables used in this Activity Centre are almost all used by the Load blender personnel, who order these supplies as and when needed. Schedule 5 Fud Activities consumedof activity driver $95,008 Assigned di to products mana Process receivables 600 invoices Process payables 300 chase orders Production planning 160 lproduction schedules Reports to Health Dept 160 [reports Process sales order 650 sales orders Dispatch sales order Product Development 500 dispatches 0 Assigned dire 160 batches 160 batches 160 batches to new products lines Ins ingredients Disposal of substandard ingredients Move to mixing room Set up blender 160 lbatches Weigh and sort ingredients 160 batches Load blend 51,750 kilograms rate blender 160 batches Unload and Clean blender 160 lbatches Move to filling room 160 batches 160 batches 160 batches Set up scales Weigh in ents Load boiling vats 160 lbatches Coagulate, Drain and Scald 51,750 kilograms Drain and clean vats 160 batches Move to moulding room 51.750 kilograms Load h 206.400 [products Set up moulds and Move to moul Mould products and pack Unload moulder Ins t finished products tra Disposal of substandard product tra Move to truck 2.070 Finished tr r kilogram 9 per unit of product Direct Materials Current Market Selling Price Batch size 1,300 Annual Volume 207,000 All Calculations to 4 decimal places Schedule 6 Activities consumed of driver 11,474 Ass to products Process receivables 100 orders Process payables 60 to Health 60 Process sales order 190 Isales orders sales order ches 100 Product Development $89,249 Assigned directly to new products lines 50 batches Disposal of substandard ingredients 50 [batches Move to mix 50 lbatches Set up b 50 batches and sort ingredients 50 Ibatches 12,500 kilograms Load b rate blender 50 [batches Unload and Clean blender Move to filling room 50 [batches Set up scales ingredients 50 batches ats Coagulate, Drain and Scald 12.500 kilograms 50 [batches Drain and clean vats Move to moulding roomm 12,500 kilograms Load 800 Set up moulds and Move to 520 Mould and package 520 of substandard Move to truck 500 Finished tr Current Market $13 per unit of Batch size 500 Annual Volume 25,000 AlW Calculations to 4 decimal places Digitalgen Company Case and Data Schedules Digitalgen Company Case Background Digitalgen Company manufactures a wide range of confectionery. Twenty years ago Digitalgen Company had only three product lines (Fudge, Caramels, and Toffees) The company produced large volumes of each product, using very simple machinery and a lot of hard work The company still makes and sells a lot of the original three product lines, but now also produces a wide range of low-volume speciality lines (Pastilles, Almond Nougat, and Candied Almonds) The low-volume speciality ines are complex to produce and their short production runs involve a lot of extra machinery setups and material handling. But the current figures indicate that these speciality lines have very good profit margins The company has undergone some dramatic changes within the business over the past 15 years. The factory had seen the introduction of computer-controliled blending and tilling machines and baking facilities that replaced a lot of the direct labour operations, and an increased emphasis on quality and delivery performance. In fact, right across the business, more and more effort had been placed on keeping the customer happy. Despite all this progress, the company seems to be struggling. Profits are declining, and for the company to survive senior management has indicated to staff that they must be more productive Senior management also indicated that the company must focus on increasing sales, particularly in the range of high-margin specialty products. The company's management accountant had become concemed about the conventional product costing system at Digitalgen Company. The manufacturing people were also sure that the costing system was distorting product costs. Schedule 1 Resource Cost Categories and Resource Drivers Cost ca Cost Resource driver 50 Number of $1,935,000 Floor Building costs 1290,000 Machine hours $64,500 Orders $270,900 Kilowatt hours used $64,500 Number of Total $10,881,150 All Wages Costs can be considered indirect costs for the purposes of this case. The current conventional approach to allocation of overheads is to use a plantwide rate. The current plantwide rate in use can be approximated by using the estimated annual number of units produced as the level of activity. Schedule 2 Resource drivers consumed Ener chine hours Product 300 10 Sales and distribution 12 700 10 12000 700 12000 Blendin 5100 190 32 130 1200 190 Administration 12 700 20 10000 Total quantity of resource drivers across all 124 700 12700 570 974000 124 AlUl Calculations to 4 decimal places Schedule 3 Activities and resource drivers used B labour time Percentage of floor machine hours 10% 10% h and sort ingredients 70% 10% Unload and Clean Move to 10% Total 100% Al Calculations to 4 decimal places In this Activity Centre, the only activity that makes significant use of machinery and therefore depreciation, consumables and energy) is Operate blender Various consumables used in this Activity Centre are almost all used by the Load blender personnel, who order these supplies as and when needed. Schedule 5 Fud Activities consumedof activity driver $95,008 Assigned di to products mana Process receivables 600 invoices Process payables 300 chase orders Production planning 160 lproduction schedules Reports to Health Dept 160 [reports Process sales order 650 sales orders Dispatch sales order Product Development 500 dispatches 0 Assigned dire 160 batches 160 batches 160 batches to new products lines Ins ingredients Disposal of substandard ingredients Move to mixing room Set up blender 160 lbatches Weigh and sort ingredients 160 batches Load blend 51,750 kilograms rate blender 160 batches Unload and Clean blender 160 lbatches Move to filling room 160 batches 160 batches 160 batches Set up scales Weigh in ents Load boiling vats 160 lbatches Coagulate, Drain and Scald 51,750 kilograms Drain and clean vats 160 batches Move to moulding room 51.750 kilograms Load h 206.400 [products Set up moulds and Move to moul Mould products and pack Unload moulder Ins t finished products tra Disposal of substandard product tra Move to truck 2.070 Finished tr r kilogram 9 per unit of product Direct Materials Current Market Selling Price Batch size 1,300 Annual Volume 207,000 All Calculations to 4 decimal places Schedule 6 Activities consumed of driver 11,474 Ass to products Process receivables 100 orders Process payables 60 to Health 60 Process sales order 190 Isales orders sales order ches 100 Product Development $89,249 Assigned directly to new products lines 50 batches Disposal of substandard ingredients 50 [batches Move to mix 50 lbatches Set up b 50 batches and sort ingredients 50 Ibatches 12,500 kilograms Load b rate blender 50 [batches Unload and Clean blender Move to filling room 50 [batches Set up scales ingredients 50 batches ats Coagulate, Drain and Scald 12.500 kilograms 50 [batches Drain and clean vats Move to moulding roomm 12,500 kilograms Load 800 Set up moulds and Move to 520 Mould and package 520 of substandard Move to truck 500 Finished tr Current Market $13 per unit of Batch size 500 Annual Volume 25,000 AlW Calculations to 4 decimal places
