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 Activity Inspect meat Disposal of poor meat Move to mincing room Load mincer* Operate mincer Unload mincer* Move to mixing room Load mixer* Operate mixer Unload mixer Move to packing room Pack meat into skins Move to smokehouse Move to truck Quantity of activity driver used 30 inspections 200 kg 80 barrow loads 40 loads 5000 kg 60 loads 80 barrow loads 60 loads 60 loads 60 loads 80 barrow loads 10000 skins 500 trolley loads 500 trolley loads Cost per unit activity driver $50 per inspection $4 per kg $8 per barrow $30 per load $2.50 per kg $25 per load $15 per barrow $20 per load $40 per load $20 per load $10 per barrow $0.50 per skins $8 per trolley $15 per trolley * These activities must be performed more than once per batch because of the limited capacity per machine. 1 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 TTFL'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) 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 Activity Inspect meat Disposal of poor meat Move to mincing room Load mincer* Operate mincer Unload mincer* Move to mixing room Load mixer* Operate mixer Unload mixer* Move to packing room Pack meat into skins Move to smokehouse Move to truck Quantity of activity driver used 30 inspections 200 kg 80 barrow loads 40 loads 5000 kg 60 loads 80 barrow loads 60 loads 60 loads 60 loads 80 barrow loads 10000 skins 500 trolley loads 500 trolley loads Cost per unit activity driver $50 per inspection $4 per kg $8 per barrow $30 per load $2.50 per kg $25 per load $15 per barrow $20 per load $40 per load $20 per load $10 per barrow $0.50 per skins $8 per trolley $15 per trolley * These activities must be performed more than once per batch because of the limited capacity per machine. 1 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) II 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 TTFL'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)