The assignment consisted few questions (7 questions), but i have done few parts of it. I just need the writer to answer question #7 based on the answer question no 6.
Your group is a team of consultants who specialise in cost allocation. You have been employed by an Australian publically listed manufacturing company to explain to senior management different approaches to cost allocation matters and to advise them as to the appropriateness of adopting Activity Based Costing (ABC). Your task is to provide them with a report addressing the following:
1.Select one divisionof the company as the focus of your assignment.
Make sure that the products of your division have some common manufacturing processes but are sufficiently different in use/consumption of these processes so that the calculation of the cost of each product would require the use of a costing system. If this is not the case for the division you selected, select and
research a different division of the company or select a different company. Be aware that the company you choose may not have multiple divisions. In
that case, references in this assignment to ‘division’ should be interpreted as references to the entire company. Here, i chose COCA COLA as the company.
Provide a brief overview of the division selected (be very careful not to plagiarise any materials in doing so).
Select and describe briefly between 4 and 8 of the products manufactured by the division (6marks).
2.Research the division’s likely manufacturing processes.
In your report,list and describe the likely production and support departments involved in the manufacturing processes. Limit the number of production departments described to 2 – 5, and the number of support departments to 3 -7. (4 marks)
3.List and describe the cost types (direct material, electricity, building rent, etc) likely to be incurred by the division and identify
the likelycost behaviour ofeach cost type.
4.Using your research from requirement 2 and with reference to the diagram on page 288 of your text book, illustrate the flow of costs to the departments ( assuming the departments are the cost objects). For each cost pool, suggest and justifyan allocation base. Don’t forget to illustrate the flow of any direct costs that you identified in
5.With reference to the diagram on page 293 of your text book,
and the departments identified in requirement2, illustrate a likely two stage allocation process for your chosendivision. In addition,
write a section that suggests at least two possible allocation bases for each department (support and production departments) and
justify the allocation bases that you chose foreach of the departments.
6.Make a recommendation that addresses the following question:
Would an Activity Based Costing (ABC) approach to overhead allocation be appropriate in this division? Why or why not (explain fully)?
7.Irrespective of your recommendation inrequirement 6, assume that the management of the division decided to implement ABC for the allocation of manufacturing overhead to the products identified in requirement 1. Describe to management what their costing system would look like if they implementedABC; this would involve
identifying and describing likely activities (activity centres) (limit the number of centres to 6-12). For each activity centre, specify the activity level (unit / batch / product or facility level) and suggest and
justify a likely activity driver. Summarise this information in a diagram which illustrates the flow of costs to products on the basis of activities
(this should be printed with a landscape orientation)
I will upload the stuff i have done, particularly question no 1 & 6 so it might help to answer question no 7. i will also upload the lecture notes that might help answer question no 7. For question 6, we’re recommending that ABS IS NOT SUITABLE BUT INSTEAD PROCESS COSTING IS APPROPRIATE
Answer Q. 1
Division: Non-Alcohol Beverages of Australia
Coca-Cola Amatil (CCA) is one of the largest non-alcohol beverages bottlers in Asia-Pacific region and one of the world’s top five Coca-cola bottlers. CCA produces the Australian market’s number one cola brand, Coca-Cola and the number one bottled water brand, Mount Franklin and so on. CCA’s head office is located in Sydney and the company is one of the ASX’s “top 30” listed company. The major shareholder of CCA is The Coca-Cola Company (TCCC) who owns 29.2% of CCA’s share and has two directors on CCA’s nine member Board of Directors.
They divide their business into categories of non-alcohol beverages & alcohol, food and services. And the non-alcohol beverages business is further categorized into three different regions: Australia & New Zealand and Fiji & Indonesia and PNG. This report focuses on the non-alcohol beverages division that operates in Australia.
The major products from this division are Mount Franklin, Deep Spring and Kirks. As mentioned before, Mount Franklin is Australian’s number one bottled water brand. In 2012, Mount Franklin was consumed by 49% of drinkers (reference). Deep Spring is slightly carbonated sparkling New Zealand mineral water combined with fruit juice that has no artificial flavors or colors. Kirks creaming soda is one of Australian’s oldest soft drink brand (made since 1865). It is an iconic to Australian consumers mostly because its name. Besides these three, this division also produces energy drinking such as Mother. Mother has been introduced to Australia by TCCC in late 2006.
The production process involves many steps, mainly carried out though automation. Firstly, since the secret formula is not shared with the bottling partners, the Coca Cola company ships the various flavoured concentrates to the franchised bottling plant.
The manufacturing departments are directly involved with the production of goods at the bottling plant, which defer from the support departments, as the later are not directly linked to the production process but are necessary in the assistance of production. Firstly, the empty bottles are delivered to the bottling plant, where they are rinsed with treated water by machines. The mixing department is concerned with thoroughly combine all the ingredients together with the use of large industrial equipment. This department proceeds by adding sweetener, which makes up 7-12% of the beverage, into the concentrate to form syrup.
Concurrently, water quality is essential as it makes up to 86% of the beverage. Hence at the water purification department, their water goes through a two-stage purification process including a multi barrier treatment system, sand filter and active carbon filter; this is the main function of this department.
Secondly, all these components are brought together in the mixing department, where machines called proportioners, regulate the ratios of the ingredients. After mixing the syrup with water, the next step is carbonation. Which is done through a carbonator and cooler which adds fizz but the degree of carbonation will vary. For example, fruit based drinks will require a lower amount. Carbon dioxide is a uniquely suitable gas for soft drinks because it is inert, non-toxic, and relatively inexpensive and easy to liquefy, hence is used by many soft drink companies including Pepsi Co.
Finally, the beverage moves to the bottling department, the empty bottles are filled at high flow rates and sealed with pressure resistant caps. Then, labelling of the bottles with product information and packing into crates are the final procedure, with each product and batch being codes to be traced individually to the point of sale.
The main support departments are the categorized based on their function. Almost the entire production process is automated but when the equipment is not in use, the Clean-In-Place Unit of the maintenance department sends sanitizers and 180 degrees Fahrenheit water through all the equipment in the bottling line to clean the interiors of the pipes and machinery when not in use. Further, the company is committed to sustainability, therefore their recycling department is responsible for the collection, cleaning and re use of material from recycled packaging such as cans and bottles for re use in the manufacturing process. Since the taste of the beverage is affected by water quality, the treated water is regularly sampled and tested by the quality control department to meet quality standards.
Flow of Costs
A cost object is the item for which management wants a separate measure of cost. Can be classified into direct and indirect costs.
The departments are the cost objects of the company, which means management wants a separate measure of cost for each department.
Production departments: Water purification, mixing, labelling and bottling.
Support departments: Recycling, quality control, maintenance, and handling.
Direct Costs: Machine usage, labour, and water.
Indirect Costs: Electricity,
Raw materials: Carbon dioxide, water, sugar, and concentrate.
Shows & explains direct costs
Add some more ideas here please. Also we need at least 5 support departments. So I’ve added handling department there.
Answer Q. 6
There are several reasons why conventional approach to product costing system is very likely to result in inaccurate costs for company like CCA. The most critical reason is an increasing proportion of manufacturing overhead costs that is non-volume-driven. This is further because of a greater product diversity and an increasing use of automation. For an intensely competitive market where CCA operates in, product diversity is essential to meet the demands of different customers. It leads to a more complex production process that requires more manufacturing overhead support, such as production scheduling and material handling and even non-manufacturing overhead will increase that is incurred through research and development. An increasing use of automation in manufacturing also implies more non-volume-driven overhead costs are incurred.
On the other hand, ABC can help solve the distorted costs problem. What is more, due to its nature it can also help identifying profitable customers and the reason behind that profitability. With this information, CCA is able to maximize its profit according to different class of customers.
For the above reasons, we strongly recommend CCA to apply ABC system. In fact, TCCC is one of the first to fully apply ABC in US. (reference, journal and textbook)
NOTES ON ABC
Why conventional cost system need to be adjusted?
-manufacturing overhead costs are increasing and becoming more non-volume-driven, and the proportion of non-manufacturing costs that are incurred to develop, support and promote products are becoming more substantial. Why?? 1. Growing automation has increased manufacturing overhead costs. More machines implies more non-volume-driven overhead costs are incurred, such as Dep, insurance and setups (for example, Dep are measured in life-years of a machine rather than the production volume). 2. Greater product diversity has caused increased production complexity and this has led to increased demand for manufacturing overhead support, such as production scheduling, material handling and production setups. 3. Increased customer demands for improved service and quality have resulted in increased manufacturing overhead and non-manufacturing costs. 4. Many organizations are investing more resources in downstream areas such as customer service and marketing.
Volume-based cost drivers do not drive many of the above costs therefore they are inappropriate to use in costing products.
Conventional approach to product costing did not cause too many problems when businesses produced a limited range of products. Product diversity causes cost distortions because conventional costing system are not good at recognising different overhead consumption patterns for different products.
Conventional approaches to product costing are likely to result in inaccurate costs when:
– the proportion of direct labour costs decreases
– the proportion of manufacturing overhead costs increases
– the proportion of manufacturing overhead costs not related directly to production volume increases.
– non-manufacturing costs that are product-related become substantial
– product diversity increases.
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