Cambden Cakes Case Study

Cambden Cakes is a private company run by Ronald, which manufactures and distributes a variety of cakes and pastry products to supermarkets throughout Victoria, Australia. It initially produced a small range of high quantity products when first established in 1957. This report analyses the current costing system and a refined costing system for Cambden Cakes. The existing costing system, also known as conventional costing system, which costs are allocated to one single cost driver. It may cause inappropriate cost allocation. The recommended costing system is activity-based costing (ABC) system. An ABC system, which activities associated with production are determined, and costs are allocated to products based on individual products ' consumption

It is also noticeable that the company incurred large amount of overhead costs, different in manufacturing volume among the product line as well as manufacturing complexity. ABC system is essential and useful to manufacturing industry where involves more than two activities, overhead cost attributed to a distinct type of activity (Jerry et. al. 2012), for example, based on refined costing system in this case, packing cost will base on the number of packets of cakes and pastries while inspect pastries cost only takes number of pastries into account. Other than this, Cambden Cakes also produces speciality products, such as danish-pastries, donuts and vanilla slices, it involves complex manufacture process and different in volume and support service with high-volume products. Hence, with the introduction of ABC system, it provides the exact parameters of overhead absorption to the organisation (Jerry et. at. 2012). In other words, rather than using predetermined overhead rate to each product and job, overhead costs need to differentiate between high and low volume products. Irrelevant cost to a product can be

It is remarkable that results of sponge cake from existing costing system was overstated for $0.18 while danish was understated for $2.11. It creates a trivial variance of 4.88% lower in sponge cake production while 48.17% considerably higher in danish. The reason behind is because both costing systems allocated overhead costs by different cost pools and cost drivers (Horngren et. al. 2014). Current costing system allocated all overhead costs in one cost pool using only one unit based cost driver, which is number of products produced. Hence, as in Cambden Cakes, high-volume products are overcosted and low-volume products are undercosted due to all manufacturing costs are treated as homogeneous under current costing systems. ABC systems in contrast uses 22 activity cost pools and 11 different cost drivers for different activities. Subsequently, it precisely represents the cause-and-effect relationship between the activity and the cost and therefore costs are allocated more accurately (Horngren et. al. 2014). Costs are clearly allocated based on individual products’ consumption or demand for each