Case Study
Contents Page
Page
1 Executive Summary 5
2 Introduction 6
3 Current Costing System 7 3.1 Limitations 7 3.2 Potential Consequences 8
4 Activity Based Costing System 9 4.1 Appropriate Approach 9 4.2 Overcome Consequences 10
5 Tables 5 and 3 11
6 Analysis 12 6.1 Current Costing System 12 6.2 Activity Based Costing System 12 6.3 Differences in Total Product Costs 13
7 Recommendation 14
8 Conclusion 15
9 Appendices 16 Appendix A: Calculations for Table 5 16 Appendix B: Calculations for Table 3 17 Appendix C: Calculations for Current Costing System 18 Appendix D: Calculations for Activity Based Costing System 19
1. EXECUTIVE SUMMARY
Over the decades, Cambden Cakes had grown and expanded such that the production process had changed from a very labour intensive factory to a machine intensive factory.
As the main purpose of production costing system was to facilitate decision making and consider how Cambden Cakes had changed, it was observed that the current costing system might not be a suitable costing system.
The objective of the report is to emphasize the proposed Activity Based Costing (ABC) system will be a more appropriate costing system for Cambden Cakes as compared to its existing costing system.
In summary, the report has determined that the current costing system distorts the production costs between high and low volume products that the business produced significantly. In contrast, ABC system provides much more accurate costing information which will consequently enable the management to make the apposite decision.
2. INTRODUCTION
Cambden Cakes was a very well known manufacturer and distributor in the cake and pastry industries throughout Victoria, Australia. Cambden Cakes was a family business that has been bequeath through the generations since 1957. Due to the growth
Page
1 Executive Summary 5
2 Introduction 6
3 Current Costing System 7 3.1 Limitations 7 3.2 Potential Consequences 8
4 Activity Based Costing System 9 4.1 Appropriate Approach 9 4.2 Overcome Consequences 10
5 Tables 5 and 3 11
6 Analysis 12 6.1 Current Costing System 12 6.2 Activity Based Costing System 12 6.3 Differences in Total Product Costs 13
7 Recommendation 14
8 Conclusion 15
9 Appendices 16 Appendix A: Calculations for Table 5 16 Appendix B: Calculations for Table 3 17 Appendix C: Calculations for Current Costing System 18 Appendix D: Calculations for Activity Based Costing System 19
1. EXECUTIVE SUMMARY
Over the decades, Cambden Cakes had grown and expanded such that the production process had changed from a very labour intensive factory to a machine intensive factory.
As the main purpose of production costing system was to facilitate decision making and consider how Cambden Cakes had changed, it was observed that the current costing system might not be a suitable costing system.
The objective of the report is to emphasize the proposed Activity Based Costing (ABC) system will be a more appropriate costing system for Cambden Cakes as compared to its existing costing system.
In summary, the report has determined that the current costing system distorts the production costs between high and low volume products that the business produced significantly. In contrast, ABC system provides much more accurate costing information which will consequently enable the management to make the apposite decision.
2. INTRODUCTION
Cambden Cakes was a very well known manufacturer and distributor in the cake and pastry industries throughout Victoria, Australia. Cambden Cakes was a family business that has been bequeath through the generations since 1957. Due to the growth