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Maragan Packaging ( Maragan ) manufactures two types of packaging containers for food distribution : Plastic and Other ( non - plastic ) . Maragan supplies food manufacturers with standard designed containers but also manufactures containers for specific client orders which depend on the type of food being carried . The Plastic containers market is well - established with all manufacturers producing similar sizes and types of products . The Other containers market is newer with greater possibilities for different designs for stacking and carrying purposes . The Other containers market has arisen as plastic is seen as a less attractive product due to difficulties in recycling it . Clients often choose Maragan as its design department has a strong reputation for blending the client's existing brand and marketing into the packaging which it designs for them . Maragan is a high volume producer , since the selling price of food containers must be kept low in order to satisfy the needs of the food manufacturers . The chief executive officer ( CEO ) wants to reinforce the strategy of cost leadership at Maragan and he wants to use activity - based management ( ABM ) to allocate costs more accurately and to identify non - value adding activities

The first department to be considered in the ABM project is the packaging design department as it has been believed for some time that the current method of cost allocation is giving unrealistic results for the two product types ( Plastic and Other ) . The chief financial officer ( CFO ) absorbs the cost of design into the product cost on a per unit basis . This has involved simply allocating the total departmental costs based on the total number of units produced . The CFO suspects that an activity - based approach will yield different results . After a lengthy process of interviewing the finance and department staff , a more detailed view of the work of the design department has been gathered along with its existing cost data ( see Appendix 1 ) . As an initial step , the CEO wants you to evaluate the impact of using activity - based costing ( ABC ) compared to the existing costing method for the design of both types of product . For simplicity in this exercise and to highlight the difference between the types of containers , the CEO has told you to assume that Maragan only produces one sort of product for each of Plastic and Other . Once the evaluation of the impact of using ABC on the costs and activities of the design department is complete , the CEO wants you to make use of your evaluation to consider the implications for introducing ABM on this department . The CEO is especially interested in how this project may impact on the activities and quality of the department's work

1. There were 6,500 orders for Plastic containers (each order having an average of 400,000 units) 2. There were 1,600 orders for Other containers (each order having an average of 187,500 units) Notes: Total department cost (except intellectual property protection fees) is to be allocated using staif ff the costs in the department \begin{tabular}{llll} \hline 24 & Initial design of packaging & 30% & Relates to 8,100 orders in the year \\ \hline 25 & Materials testing and prototype preparation & 10% & Done once an order is received \\ \hline 26 & Final redesign & 25% & Done once a prototype is accepted by \\ \hline 27 & Intellectual property protection & 5% & Only applies to Other orders \\ \hline 28 & & \\ \hline 29 & Notes: & \\ \hline 30 & 1. Total department cost (except intellectual property protection fees) is to be allocated usina staff \end{tabular} 31 of the costs in the department 32 2. Intellectual property protection only applies to each order of Other containers, as Plastic orders a 33 both staff time and the associated fees. 34 3. Enquiries are in the same proportion as orders for Plastic and Other containers. 35 4. Handling enquiries and preparing quotes take the same time for each type of product. 36 5. All orders proceed to final design as Maragan manages its client relationship carefully through th 37 6. The processes of initial design, materials testing and prototype preparation, and final design are 38 containers and so take 50% longer for each order, compared to Plastic. 1A Maragan (information for the year ending 30 June 20X5) 3 Note: At Maragan, product costs are discussed in dollars and cents per 1,000 units 5 Design department 5 Design department 6 Existing costing data: \begin{tabular}{rll} \hline 8 & Wages \\ \hline 9 & Staff training \\ \hline 10 & Allocated overheads (utilities) \\ \hline 11 & Allocated overheads (depreciation) \\ \hline 12 & Intellectual property protection fees \end{tabular} Notes: 1. There were 6,500 orders for Plastic containers (each order having an average of 400,000 units) 2. There were 1,600 orders for Other containers (each order having an average of 187,500 units) Activity-based costing data: Activities of the Design department Staff time Comments It is now 1 September 205. Respond to the CEO's instructions for work on the following areas: ption(s) (a) Design costs allocation (b) Introduction of ABM (13 marks) (7 marks) Professional marks will be awarded for the demonstration of skill in analysis and evaluation and commercial acumen in your

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