Problem -
Baker's Delight, Inc., (BDI) has been in the food-processing business for three years. For its first two years (Year 1 and Year 2), its only product was raisin cake. All cakes were manufactured and packaged in one pound boxes. BDI used a normal costing system (actual direct material cost, actual direct labor cost, and manufacturing overhead assigned using a predetermined overhead rate) during its first two years. Manufacturing overhead was allocated to products using a units of production allocation base.
In its third year (Year 3), BDI added a second product -- layered carrot cake -- that was packaged in one pound boxes as well. Layered carrot cake differed from raisin cake in several ways:
- The ingredients used in the layered carrot cake were more expensive than those of the raisin cake.
- It took more direct labor time to make a one pound box of layered carrot cake.
- The manufacturing process for layered carrot cake was more complex.
In Year 3, BDI continued to use its existing cost system where a unit of production of either type of cake was weighted the same in allocating manufacturing overhead. Direct materials cost in Year 3 were $0.60 per pound of raisin cake and $0.90 per pound of layered carrot cake. Direct manufacturing labor cost in Year 3 was $0.14 per pound of raisin cake and $0.20 per pound of layered carrot cake.
During Year 3, BDI sales people reported greater than expected sales of layered carrot cake and less than expected sales of raisin cake. The budgeted and actual sales volume of Year 3 were as follows:
|
|
Budgeted Volume
|
Actual Volume
|
|
Raisin cake
|
160,000 pounds
|
120,000 pounds
|
|
Layered carrot cake
|
40,000 pounds
|
80,000 pounds
|
The budgeted manufacturing overhead for Year 3 was $210,800.
At the end of Year 3, Stanley Stobe, the controller of BDI, decided to investigate how the use of an activity-based costing system would affect the product cost numbers. After consultation with operating personnel, the single manufacturing overhead cost pool was subdivided into five activity areas. These activity areas, their drivers, there Year 3 budgeted costs, and the driver units used per pound for each type of cake were as follows:
|
Activity
|
Driver
|
Budgeted Year 3 Activity Cos
|
Driver Units per Pound of Raisin Cake
|
Driver Units per Pound of Layered Carrot Cake
|
|
Mixing
|
Labor time
|
$44,800
|
5
|
8
|
|
Cooking
|
Oven time
|
$61,600
|
2
|
3
|
|
Cooling
|
Cool room time
|
$13,600
|
3
|
5
|
|
Creaming/icing
|
Machine time
|
$30,000
|
0
|
3
|
|
Packaging
|
Machine time
|
$60,800
|
3
|
7
|
Required:
1. Compute the Year 3 unit cost of raisin cake and layered carrot cake with the normal costing system that was employed during Years 1, 2, and 3.
2. Compute the Year 3 budgeted cost per driver unit of (a) mixing; (b) cooking; (c) cooling; (d) creaming/icing; and (e) packaging.
3. Compute the Year 3 product cost per cake under the activity based costing system proposed by Stanley Stobe.
4. Explain the differences in unit costs computed in requirements 1 and 3 above.
5. Describe three uses BDI might make of the activity-based cost numbers.