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Costing systems overstate or understate the cost of producing.

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The French pastry company makes a range of delicious cakes and pastries. Their website shows the following information about the company’s history: The business began in 1990, with three product lines – croissants, fruit tarts and eclairs. The products were very successful and we sold everything we could produce, using hard work and simple machinery. Today, we still make and sell a lot of croissants and eclairs, but we also produce a wide range of low volume lines such as fruit danishes, snails, and friands. These products are more complicated to produce and have shorter prod...

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Question Preview:

The French pastry company makes a range of delicious cakes and pastries. Their website shows the following information about the company’s history: The business began in 1990, with three product lines – croissants, fruit tarts and eclairs. The products were very successful and we sold everything we could produce, using hard work and simple machinery. Today, we still make and sell a lot of croissants and eclairs, but we also produce a wide range of low volume lines such as fruit danishes, snails, and friands. These products are more complicated to produce and have shorter production runs, so that there is more set-up time for the machinery and more material handling. We have introduced computerised mixing machines and ovens which have replaced a lot of direct labour in our factory, and we are focussing more on delivery and quality to meet our customers’ requirements. You have recently been hired as the management accountant for the business due to the retirement of the previous management accountant, who had been with the business since it began operations. When you look at the results, the company’s profits have been declining over recent years. However, the product profitability analysis for the specialty lines on fruit danished, snails and friands shows that they are profitable. You wonder if there is a problem with the product costing system which the French pastry company is using. When you talk to the manufacturing supervisors and managers, they also believe that the product costing system is distorting the costs. Required: Using the information given above, describe the changes in cost structure which would have occurred at the company over the last 20 years, and explain their causes Do you think the existing costing systems overstate or understate the cost of producing Croissants b. Snails Explain how activity based costing could overcome the deficiencies in the existing costing system After many meetings with manufacturing staff, you have identified the activity centres in the business, and collected information about some activity drivers. Identify the best activity (cost) driver for each activity centre, and prepare notes on why you have selected each driver to explain your choices to managers in your next meeting. Cost Category Cost Cost Driver Wages $ 300,000 No of employees Building Costs $ 80,000 Floor space Depreciation $ 100,000 Machine hours Consumables $ 50,000 Orders placed Energy $ 400,000 KwH used Other $ 20,000 No of employees Total $ 950,000 Building Machine Activity Centres Employees sqm Hours Orders KwH Product Development 5 200 10 Sales and Dispatch 10 500 15 Mixing 15 500 1,000 50 10,000 Filling 20 1,000 3,000 100 10,000 Baking 15 500 5,000 100 200,000 Packing 20 1,000 500 150 30,000 Administration 10 1,000 500 50 Corporate Management 5 300 25 Total 100 5,000 10,000 500 250,000 5) Use activity based costing to develop the cost for each activity centre.

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Using the information given above, describe the changes in cost structure which would have occurred at the company over the last 20 years, and explain their causes.

 Before deriving the changes that would have taken place in the cost structure of the French pastry Company, it is important to understand what makes up the cost structure. Cost structure includes the various kinds of as well as comparative extents of variable and fixed costs, incurred by a business. The cost structure can be utilized as a tool for determining prices, in case the company uses the pricing strategy that is cost-based, and also to bring those areas into attention, where there can be possible cost reduction or can be at least controlled.

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