Griffith University 7114AFE Accounting Assignment Report

This accounting assignment analyzes the cost structure and allocation methods of Cravings for Cakes, a company that has evolved from producing a few high-volume products to a diverse range of low-volume specialty items. The report examines the impact of these changes, including increased production costs, new technologies, and marketing expenses, while acknowledging the positive profit margins of the new product lines. The analysis includes an assessment of the company's existing cost system, highlighting the underestimation and overestimation of costs for different product lines (Lamingtons and Danish pastries). The assignment emphasizes the advantages of activity-based costing (ABC) and its ability to accurately apportion costs, recognize cost drivers, and improve decision-making. The report also discusses different methods of cost allocation, including simple allocation, allocation with cost drivers, and the comprehensive ABC method. The goal is to provide recommendations for improving the company's costing system and enhancing its overall financial performance.

Accounting
Assignment

By student name
Professor
University
Date: 30TH April 2019.
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Table of Contents
Analysis...................................................................................................................... 3
References................................................................................................................. 6
1.
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Analysis
1.Over the past twenty years there have been several changes in the cost structure
of cravings for cake, previously the company use to produce only three products in
bulk using very simple machinery but now we see that the company is producing
different ranges of low volume lines like Danish pastries, vanilla slices, but these
products are very complex to produce, involves large number of machinery and the
overall production cost is also huge (Boghossian, 2017). Thus, we can say that
introduction of new product lines has contributed to the increase in the cost of the
company from the past. The increase in cost has been in the form of increased cost
of production, using new technologies, computer controlled mixing machines that
have replaced direct labor and there has been increased emphasis on quality and
production. Thus, we see that all this have held to an increase in the overall cost for
the company. New era also demands for better promotion and advertisement and
thus cost of marketing has also increased. But as per the accountants these new
lines of product have wonderful profit margins, so the company is overall benefiting
even when the cost has increased on many levels as the revenue has also increased
(Borit & Olsen, 2012).
2. Based on the existing cost system of the company, it can be said that in case
of
a) Lamingtons – Lamingtons are the products that the company has been
producing since the last 20 years and it is stated that cost involved in
production of such products is low, but the profit is also not high. The
company produces large volume of these products as they are relatively
simple from the specialty line of products. It can be said in this case that the
company is understating the cost, because even though the cost is low, the
overall production done by the company is very high and there are high
chances that because of this high volume the cost is also relatively high and
if the profit is not good in these products, the company should aim to reduce
the overall volume of production and increase the production of specialty
goods.
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b) Danish Pastries- These products are those that are produced as a part of the
specialty range and the overall production cost is assumed to be very high in
this case along with the fact that the company makes good profit in such
product line. The cost of production is assumed to be high, as production
involves complex machinery set ups and the production cost also increases
accordingly. Thus, it can be said in this case the company has overstated the
cost, as the company is producing low volumes the cost is very high and thus
to increase the profit, the production needs to be increased (Freeman, Wicks,
& Parmar, 2004). The overall allocation of cost also needs to be taken care of
so that appropriation of the cost is done properly, and the company can make
more profit and reduce its issues involved with costing.
3. There is a lot of advantage associated with activity based of costing. It helps
in apportionment of the cost in correct measures and thus helps in correct
pricing of the products. It helps in recognizing the activities which causes the
cost and it’s the product that consumes activities. It helps in proving reliable
product cost. It helps in understanding the correct nature of the cost and this
helps in reducing cost and helps in identifying which cost do not add value to
the products. With help of activity-based costing it helps in controlling the
fixed overhead cost over the activities which caused these fixed overhead
cost. It uses cost drivers to apportion the cost and allocate the cost
accordingly (Iggers, 2018). ABC costing also helps in better decision making,
it helps the companies in understanding which cost is being incurred more
and whether that cost is justified or not. In case the company finds that cost
allocation in some products is huge but the profit that it is generating is not
up to the mark, then the management can stop the production of these
products and make sure that the overall allocation of cost happens in a better
way, so this will help the company to be better than the existing cost system.
The existing cost system is having a lot of issues with proper allocation of
cost to the products, because of that we see that in some cases the cost of
production is very high, even though the profit is low, and the volume of
goods produced by the company does not justify the high cost that the
company is incurring. Now the company is following traditional method of
costing and that is not helping in determining the overall production cost. So
the profit is also very low, and even though the company is using the best of
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technology the profit is not increasing and this is a point of concern for the
management of the company (Johan, 2018).
4. a) A simple method of cost allocation is used to assign overhead cost to
production considering the manufacturing cost when there is no indirect cost
hidden, and there are only costs that are attributable to the production.
There are not too many cost drivers and the overall costing method is
relatively simple in case of the company, thus these are the factors that the
company needs to consider when it has to allocate the cost to the products
including the direct manufacturing cost , that can be attributable to the
products and thus we see in this case traditional method of costing can be
used (Kaufmann, 2017).
b)In case of allocation of costs that includes both direct cost and non-
manufacturing cost, the company should use cost drivers. Non -manufacturing
cost includes cost such as salary, rent, insurance etc, these are not directly
attributable to the product, but these are indirect cost that are incurred in the
overall production. In these cases, the company needs to select the cost drivers
appropriately, and apportion the cost as per those cost drivers (Kusnadi & Wei,
2017). Non-manufacturing cost cannot be assigned to the products directly, they
help in giving information to the management with respect to decision making
and the steps that they can take to reduce such indirect cost of production.
c) In case of using a comprehensive method of activity-based costing in which
all the costs are considered except direct cost, the company needs to be
aware that the direct costs are easily identified with the product cost and
they do not affect the managerial decisions that the company needs to take.
So if the direct cost material is high, the company can use such method of
activity based costing in which all other costs are taken into consideration.
This is the basis that companies can follow in case the direct cost is
comparatively high (Norberg, 2018).
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References
Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic
responsibility. Educational Philosophy and Theory, 50(3), 244-253.
Borit, M., & Olsen, P. (2012). Evaluation framework for regulatory requirements
related to data recording and traceability designed to prevent illegal,
unreported and unregulated fishing. Marine Policy, 36(1), 96-102.
Freeman, R., Wicks, A., & Parmar, B. (2004). Stakeholder Theory and “The
Corporate Objective Revisited”. Organization Science, 15(3), 22-28.
Iggers, J. (2018). Good News, Bad News: Journalism Ethics And The Public Interest.
Johan, S. (2018). The Relationship Between Economic Value Added, Market Value
Added And Return On Cost Of Capital In Measuring Corporate Performance.
Jurnal Manajemen Bisnis dan Kewirausahaan, 3(1), 121-134.
Kaufmann, W. (2017). The Problem of Regulatory Unreasonableness (First ed.). New
York: Routledge.
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Kusnadi, Y., & Wei, K. (2017). The equity-financing channel, the catering channel,
and corporate investment: International evidence. Journal of Corporate
Finance, 47, 236-252.
Norberg, P. (2018). Bankers Bashing Back: Amoral CSR Justifications. Journal of
Business Ethics, 147(2), 401-418.
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