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Activity-based costing, sensitivity analysis and management for Brick

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i can provide sap software, and data needed

 

1

CASE STUDY

Activity-based costing, sensitivity analysis and management for Brick

Co in a carbon constrained world

The Australian brick-making industry and its global context

Climate change is having a significant impact on businesses, society, and individuals, and

it is increasingly understood that a shift towards a low-carbon economy is needed. The

building and construction sector plays a central role in this shift, with greenhouse gas

emissions from building and construction activities accounting for around 40% of global

GHG emissions (WBCSD 2018).

Bricks are a common material used in the building of Australian homes. The process of

manufacturing bricks requires, however, a considerable amount of energy, mostly

through electricity used in the grinding, pressing, forming and cooling of bricks, as well

as natural gas used in firing them. Energy consumption is consequently one of the most

significant overhead items accounted for.

With recent and significant investment in distribution and transmission lines along

Australia’s east coast, and natural gas prices reaching parity with international prices

since the Liquefied Natural Gas terminals started production in Gladstone, Queensland,

Brick Co have observed a significant increase in their electricity and natural gas bills

over the past year and are considering ways in which they can reduce their current

electricity and natural gas consumption, as well as future-proof against rising costs.

Brick Co management currently uses a traditional method of allocating overhead costs

such as electricity and natural gas, depreciation, admin, rent, repairs and maintenance

and management/supervisor salaries, using a predetermined rate based on the number

of units sold. Budgeted revenues and costs are based on prices and costs for 2020 and

are as illustrated in Table 1.

Total

Bricks (units) produced & sold 21,200,000

Revenues $ 33,600,000

Direct materials 5,104,000

Direct labour 9,780,000

Manufacturing overhead

- Gas 4,310,000

- Electricity 621,000

- Rent 464,000

- Repairs and maintenance 352,000

- Manager and supervisor salaries 168,000

- Depreciation 96,000

- Admin 65,000

Table 1: Budgeted sales, direct and indirect costs for 2021

Brick Co uses SAP for their accounting and other processes and wants to allocate its

rental costs to various departments in its Brick cost centre group (BG###) using the area

occupied by each of its departments every month. Currently, Administration (A###),

Production (P###), Marketing (M###) and Technical services (T###) departments, 

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mapped in SAP as service cost centres, are occupying 200, 2000, 400 and 600 square

metres respectively. As the departments have no control over rental costs, management

would like to allocate these costs using a method that would ensure the identity of the

rental cost is not shown in the receiving cost centre reports.

For controlling purposes, your management has decided to allocate actual direct labour

costs to various activities – Crushing (C###), Setup (S###), Forming (F###), Drying

(D###), Firing (F###) and Logistics (L###) (Logistics include packing, distribution and

admin activites) in its Factory cost centre group (BF###), based on the actual number

of casual employees engaged for each activity, i.e. 20, 8, 12, 6, 14 and 40 respectively

for these activities. Budgeted (planned) number of employees for each of the activity

are 18, 7, 10, 5, 12 and 36 respectively. While doing the allocation, management wants

to make sure these costs are shown clearly in the receiving cost centre’s performance

reports.

As a policy, your management would like to allocate actual salaries (for managers and

supervisors) to individual cost centres in the Brick cost centre group (BG###) and would

like these costs to be shown in the receiving cost centre’s performance report. As per the

current policy, 10%, 50%, 15% and 25% for Administration (A###), Production

(P###), Marketing (M###) and Technical services (T###) departments respectively.

Actual rent, gas and electricity costs are paid through an invoice submitted by a Real

Estate agent called ###RayWhite realty for the rent, and, Energy Australia

(###Energy Aust) for Electricity and Gas for the current month. All the remaining actual

costs are posted directly in the General Ledger every month. While posting, direct

materials, direct labour, gas and electricity costs are charged to Production (P###) cost

centre; Depreciation, Salaries, Rent and Admin costs are charged to Administration

(A###) department; and Repairs & maintenance costs are charged to Technical services

(T###) cost centre.

Management would like to control the costs of Technical Services and measure its service

performance. It therefore would like to measure the service rendered by the Technical

services (T###) cost centre to other cost centres and allocate the cost of providing

technical support service (SS###) to those departments in the company’s Brick cost

centre group (BG###). In the current month, the Technical services department (T###)

has provided 920, 100 and 180 hours to the Production (P###), Administration (A###)

and Marketing (M###) cost centres respectively. The total planned hours for the

Technical services department are 1000 in the current month and the service rate is $200

per hour. It is important for Brick Co to see these costs mapped and allocated in SAP

and shown in the SAP reports for controlling purposes.

While Brick Co allocates the above costs to its departments through SAP, it is nevertheless

concerned that opportunities to reduce those costs may be missed due to the complexity

of the processes involved in the manufacture of bricks as illustrated in Figure 1. For this

reason, Brick Co have recently hired your team as their Management Accountants to

assess the activities that most affect energy consumption, with a view to potentially

investing in technologies to reduce both electricity and natural gas used.

Brick Co specialise in providing two types of brick: Aus Bricks and Artisan Bricks. Aus

Bricks are the most used type of brick for family homes, and it is expected that sales for

the year will be 20,000,000 units. Artisan Bricks are special orders or designs that are

made for one-off architectural homes and buildings. Artisan Bricks often come in unusual

shapes, which affects setup and forming costs. They also often require finer crushing &

grinding and more complex firing processes. 

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Figure 1: Activities at Brick Co’s production site (adapted from Think Brick, 2014)

To conduct your assessment, you and your team spend some time at the brick production

plant, observing the operations and interviewing staff as they go about their work to

understand the different types of activities they undertake, and the different types of

machines involved.

Activity 1: Crushing, Grinding and Screening

Unlike Figure 1: Activities at Brick Co’s

production site (adapted from Think Brick,

2014)Figure 1, production activities at Brick

Co commence with crushing, grinding and

screening activities, because their

production facility in Victoria is located

right next to a clay quarry owned and

operated by a separate entity. Once the

raw materials have been mined at the

quarry, they are first crushed to break up

large clay lumps and stones, after which the

clay lumps are transported through size

reducing grinders and screens and then

mixed with water in what is called an

Figure 2: Grinding of rocks to form

clay

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agitator to produce a homogenous clay mass. Electricity consumption (megawatt hours -

MWh) is the primary cost driver for the crushing, grinding, screening and mixing activity,

with the wholesale market price for electricity forecast to be $74.55/MWh. Budgeted

consumption for 2021 is expected at 8,330 MWh, with activity levels for Artisan Bricks

being higher at 2,080 MWh due to the finer grinding required.

Activity 2: Setup

Once mixed with water, the clay is shaped in machines that force the clay through a

tube into a column, where the bricks are formed. Prior to the forming of bricks, however,

the forming machine needs to be set up with the specifications required, including the

correct dimensions of the bricks, any external designs, and the number of coreholes

shaped into the centre of the bricks. Setups change for every type of brick manufactured,

so the more bricks manufactured in a

particular batch, the less the setup costs

will be. It is expected there will be 510

setups needed throughout the year, of

which 450 will be for Aus Bricks.

Activity 3: Forming

Once the forming machine has been set

up, clay is pushed through into a brick

column, and then cut into individual

bricks with a wire. The cost driver for

forming is the number of bricks

produced and sold.

Activity 4: Drying

Wet bricks contain 7-30% moisture and, if fired when wet will crack. For this reason,

they need to be dried in drying chambers for

24-48 hour at between 30˚C and 200˚C.

Natural gas is used to warm the drying

chambers. Drying time for Artisan bricks is

longer, given the products tend to be

considerably denser. Accordingly, consumption

in 2021 is expected at around 90,650 GJ

(gigajoules) for Artisan Bricks, with current

prices in the east-coast gas wholesale market

of $5.85/GJ used as the forecast rate.

Activity 5: Firing

Once the bricks are dried, they

need to be fired in a gas-fired kiln

to develop the hardness and

strength needed for them to

become durable building materials.

This is a really important stage and,

if over-burnt, will lead to

breakage, while if under-burnt the

bricks will be too soft to carry the

loads needed in building. Kilns are

typically in a tunnel shape, with the

bricks moving in and out on tracks.

Figure 3: Forming or shaping of brick

column

Figure 4: Drying of wet bricks

Figure 5: Firing of bricks in tunnel kiln

5

Firing is the most energy intensive part of the brick production process, Aus Bricks are

accordingly forecast to consume 288,000 GJ of natural gas across the 2021 period.

Activity 6: Packing, distribution and admin (logistics)

Once the bricks have cooled, they are de-hacked or automatically stacked on pallets

and particleboard ready for shipping. Packaging, distribution and administrative costs

are dependent on the number of orders, with 800 orders expected in the coming year,

of which the bulk of them (710) will be for Aus Bricks.

As a consequence of the interviews undertaken and the observations made, you estimate

budgeted indirect costs according to the different types of activity described in the

above brick manufacturing process as follows:

Table 2: Budgeted indirect costs for 2021

Requirements 1:

1. Using traditional costing, allocate direct and indirect costs to each product line

(Aus Bricks and Artisan Bricks). Calculate the operating income and determine the

profitability for each product, by calculating operating income as a percentage of

revenue.

2. Now re-allocate indirect costs to each product line using an ABC system. From

this, recalculate direct and indirect costs based on relevant activity drivers, once

again calculating the operating income and profitability for each product, basing the

latter again on operating income as a percentage of revenue.

3. What do the above calculations reveal about the cost distribution and profitability

you observe between the two product lines? How much change do you observe

between the results under traditional costing and under ABC and why? What

implications does this have for Brick Co within the context of their current concerns?

Given the results of the above, you started working with a team of engineering

consultants to understand where Brick Co could save on their electricity and gas

consumption. From this work, you also propose three possible upgrades to the brick

production plant that have the potential to reduce costs. These are as follows:

1. Replacing the two direct on-line motors used to mix the clay with water, with two units

of more efficient motors and variable speed drives (projected to have a useful life of

around 10 years).1 These are estimated to reduce electricity consumption by 30%, at a

cost of $60,000 each.

1 Assume all technology upgrades have a salvage value of $0.

Activity Total budgeted indirect

costs

1. Crushing, grinding, screening & mixing $ 621,000

2. Setup 215,000

3. Forming 495,000

4. Drying 1,510,000

5. Firing 2,800,000

6. Packing, distribution & admin 435,000

Total $ 6,076,000

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2. Using waste heat generated by the firing process and redirecting it towards the

drying activity. This would involve investment in a waste heat recovery system at a cost

of around $360,000 but would entirely eliminate natural gas consumption associated

with drying. The waste heat recovery technology would have a useful life of 12 years.

3. Replacing 50% of natural gas consumed in the firing process with landfill gas

produced by a neighbouring landfill site. In addition, the engineers proposed replacing

the kiln burners with efficiency burners, improved kiln sealing, entry chambers and fans,

all of which retain heat and reduce heat loss. These improvements would require an

upfront investment of $1.2 million but would have a useful life of 20 years.

Based on the investments proposed, you would like to suggest several additional changes

in pricing to management as follows:

1. Given the significant increase in building activity in the economy, since the government

introduced building grants due to Covid-19, you propose Brick Co advertise to customers

an increase in the selling price for both Aus Bricks and Artisan Bricks of 10% each from

2022 onwards where orders are for less than 30,000 or 15,000 bricks respectively.

However, where orders exceed these amounts, customers are told that the selling price

increase will be for 5% on top of the 2021 price only.

2. In suggesting this, you forecast more high-volume sales and fewer low-volume sales

that will have the effect of reducing the number of orders by 10% but increase the

volume of bricks sold overall by 15%.

3. You also forecast that the effect of these changes is likely to reduce overall machine

setups by 20%.

4. Finally, and in line with the slow rates of recovery from Covid-19, costs for direct

materials and labour are also projected to increase in 2022 by 2% on 2021 levels.

Requirements 2:

Using the above information, and assuming all other cost information increases by

2% from the 2021 budget, you now conduct sensitivity analysis on the effects of the

proposed interventions on the 2022 contribution margin. The managers of Brick Co

have requested that in doing so, you consider both the effects on the income

statement as well as on the pricing of each of the two types of products relative to

the costs involved. Management would like you to do this analysis under both

traditional costing and ABC.2

To do this:

1. Categorise the different costs according to whether you believe them to be either

variable or fixed, explaining your reasoning for doing so within your analysis.

2. Then provide a critical analysis by comparing and contrast the effects of these

changes first for the traditional costing contribution margin and then for the activitybased costing contribution margin, explaining why the outcomes are as they are

and what the implications would be for Brick Co.

In doing the above please be sure to state any assumptions made.

3. Follow your analysis with recommendations to the management of Brick Co with

respect to the investments and pricing policy changes. Then comment on any specific

flaws in Brick Co’s proposed ABC system and in any of the proposed interventions.

2 Assume depreciation is pro-rated across the two products according to relevant activity drivers (under

ABC) and volume of bricks produced and sold (under traditional costing).

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8

PART A: CASE ANALYSIS (GROUP)

Based on the information analysed and the calculations your team has provided, you

need to prepare a PowerPoint presentation to report to the Management of Corinna

Corporation. Your report should contain the following for Part A.

1. Executive summary (1 slide limit) – provides an overall succinct summary of the

case including background, analysis, major findings, recommendations and

limitations (so that an executive reading the report will have enough detail to attend

and participate at a meeting even if he/she has not read the rest of the report in

detail). An executive summary needs to be thorough and informative but also

succinct.

2. Background – a description of all the important issues and their background that is

relevant to the case and the findings.

3. Analysis – an overview of the critical analysis and the insights and results obtained.

Significant calculations and tables of figures should not be included here (but in the

appendices), with this section referencing the appropriate appendices.

4. Findings – detail and justify your findings/insights from the analysis (this should not

be a simple repetition/rephrasing of the analysis). Take care to recognise and

describe any assumptions or where additional data may be necessary to further

understand the situation.

5. Recommendations – detail and justify your recommendations from the analysis and

findings ensuring that the recommendations are reasonable/justifiable and directly

address the case and/or the analysis undertaken above.

6. Action Items (Next steps) – map out a detailed plan that highlights

specific/concrete actions to be taken in order to implement any proposed changes

based on the findings and recommendations noted. This should not be a simple

repetition/rephrasing of the recommendations.

7. Limitations – detail specific limitations from the analysis such as assumptions made,

any missing information, limitations (or assumptions held) regarding the data,

calculations and case context.

8. Appendices – include all other relevant supporting material such as detailed

calculation work (that has been referenced in the body of the report). There should

be no new material or important material in the appendices.

PLEASE NOTE THE FOLLOWING!

• Important: While your calculations are important, the assignment will be valued

mainly for its critical analysis, depth and creativity.

• Cover page/title slide - provide a separate cover page with student names, SIDs

and email addresses. Only one soft copy required per group. Cover pages can be

found in Canvas.

• Executive Summary: One slide limit.

• Report: You are required to prepare your report using PowerPoint. The report must

meet the purpose of providing details for a manager with sufficient time to sit and

read the material (you will not be required to present it). You are encouraged to be

succinct in your writing style (do not waste space on stating the obvious or stating

mere descriptions of calculations or including tedious calculations or including

definitions of management accounting terminologies; while dot points are

encouraged, the writings should be sufficiently informative and detailed). Also,

remember that management would normally require as much information as would

be required to help them make informed decisions, while at the same time they would

not prefer information overload. To reflect this, the slides should be detailed and 

9

informative but not be crowded with words and/or diagrams. Each slide must be selfexplanatory, with proper headings and sub-headings.

• Please make sure to read the Marking Guide for further information.

• Note: The executive summary and report will be a total of 10 slides (1 for the

executive summary and 9 for the body of the report). Please also include a

cover/title slide in Power Point (with your names and SIDs); this will not be counted

as one of your 10 slides.

• Appendices: You are encouraged to provide all supporting information as

appendices (these do not need to be in PowerPoint – you may use Word or Excel).

The appenices should be no longer than ten (10) A4 pages. Please attach the

appendices at the end of the PowerPoint report.

• Peer evaluation: Each group is required to sign and submit ONE (1) peer evaluation

form that needs to be attached to their PDF submission. If you are in a group of four

– member #1, #2 and #3 will jointly decide the contribution of the member #4;

member #2, #3 and #4 will jointly decide the contribution on member #1; member

#1, #3 and #4 will jointly decide the contribution of member #2. And member #1,

#2 and #4 will jointly decide the contribution of menber #3 etc. You will not be

required to evaluate your own contribution.

• Contribution: Each member should be aiming for 100% contribution based on the

tasks assigned by the group. Contributions of 80% and below warrants investigation

by the Unit Coordinator and a potential penalty for all group members, whether

deemed to have contributed or not. In other words, if you have a noncontributing

group member it is your responsibility to get that individual to contribute, and hence

this being a group task - you risk being penalised as well.

• Soft copy: Create a single electronic PDF that includes the cover page, PowerPoint

report, and appendices and submit via the Canvas submission link.

10

Part B SAP component (Individual work)

1) Key Assumptions: You are required to make the following key assumptions while

mapping the costs in SAP.

a) Treat all budgeted costs for the year 2021 calculated/found in the assignment

scenario under traditional costing method as budgeted costs for the current

month (Do not calculate monthly costs).

b) Treat all the projected costs with the proposed interventions for the year 2022

calculated/found in the assignment scenario under traditional costing method

as actual costs for the current month. (Do not calculate monthly costs).

2) Your submission should:

a) Be a PDF document with around 15 pages. There is no strict limit to the maximum

number of pages. But if you provide the screens that are required and place

two screens (properly cropped) per page, it will not generally exceed 15

pages. Also, note, there is no need for a separate cover page.

b) Have your SAP User account: i.e. LEARN-### & student SID in every page

header. Penalties apply if the assignment does not have these identifying

information.

c) Contain in the first page, a list of master data elements you have created in the

system (G/L accounts, cost centres, cost elements, activity types, statistical key

figures etc.), document numbers generated by the system and allocation cycle

numbers that are available in the system in a tabular form.

d) Include appropriate screen shots of: i) Actual distribution/assessment basic

list (after actual run with the document number clearly shown in the screen)

and/or direct activity allocation document display screen showing details of cost

centres, document number and allocated values; ii) actual/plan/variance cost

centre reports (comparting BUDGETED figures with ACTUAL figures) for the Brick

cost centre group BG### and for each cost centre; and iv)

actual/plan/variance cost centre reports for Factory cost centre group BF###

for the CURRENT MONTH.

3) You must first decide which master data (G/L accounts, vendors, cost elements, cost

centres, cost centre group, activity types and statistical key figures), which

transactions and which allocation methods are required to reflect the scenario and

the reports required. You should then map them in the system by creating relevant

master data elements (in client XXX to be given in Week 7 and to be posted in a

separate announcement) using your SAP user account (LEARN-###) assigned to

you in workshops, perform transactions and produce reports in the system.

4) Hint 1: Considering the complexity of the software, limited time, and the real-time

nature of the accounting system, it is easier and efficient to repeat the relevant steps

if mistakes are made, rather than correcting the errors. Please note, the data or

transactions CAN NOT simply be deleted, and the errors will therefore carry into

the final cost centre reports.

5) Hint 2: For mapping the values and posting transactions in SAP, please consider the

actual (and budgeted costs for the traditional costing method) either given in the

assignment or calculated by you for the CURRENT MONTH only. This will produce

cost variance reports consistent with your calculations.

6) Hint 3: There is no need to map details of sales and profitability in SAP.

7) Table 1 provides a list of master data codes and Table 2 provides a list of generic

field values to be used while creating master records and executing transactions in

the SAP system. For all other values that are not given in these tables, please use

the values you have used in SAP exercises.

11

Table 1: Master data codes to be used in SAP

Details of master data

and transaction

evidence

Master data codes

1 Bank Account 100 ###, 105###, 106### etc.

2 A/P Recon. account 250###, 255###, 256###, etc.

3 Expense accounts

(possible twelve account

codes given to choose

from)

700###, 701###, 702### etc; 710###; 711###, 712### etc;

720###, 721###, 722### etc; 730###, 731###, 732### etc;

750###, 751###, 752### etc; 770###, 771###, 772### etc;

780###; 781###, 782### etc; 790###, 791###, 792### etc.

690###, 691###, 682### etc; 680###, 681###, 682### etc;

660###, 661###, 662### etc; 670###, 671###, 672### etc;’

8 Secondary cost elements 810###, 811### etc.

9 Cost centres As indicated in the Assignment description

10 Cost centre group(s) As indicated in the Assignment description

11 Assessment cycle A###, A1### etc.

12 Distribution cycle D###, D1### etc.

13 Activity type SS###, SS1### etc.

14 Statistical key figure AR###, AR1### etc. or EM###, EM1### etc.

Table 2: Generic field values to be used in SAP Master data and transactions

Details of field Field values

Account currency USD

Assessment Cele Assessed Costs

AType category – manual entry, manual allocation 1

Activity Unit – Hours HR

CElem category 1 (Primary costs/Cost reducing

revenues) or 43 (Internal activity

allocation)

Company code US00

Controlling area /Hierarchy area NA00

Cost centre category H

Country (vendor record) US

Currency USD

Current year 2021

Key fig. cat. Fixed value or Tot. values (to be

determined)

Payment Terms – Payable immediately due net 0001

Plan version 0

Price Indicator – plan price automatically based on

activity

1

Profit center NA00

Receiver Cost centre group To be determined

Receiver Rule To be determined

Sender Rule Posted amounts

Sorting key (posting date) 001

Stat. Key fig. UnM. (unit measure) M2 (Square metres) or PRS (persons) or

other relevant UnM

(5/5)
Attachments:

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