Question

Baker’s Delight (BD) has been in the food processing business for three years (2016 and 2017). BD used a traditional costing system and applied all indirect cost (manufacturing overhead) using budgeted units (pounds) as its application base. In 2016 and 2017, BD’s sole product was Raisin Cake. All cakes were manufactured and processed in one-pound units. The two direct cost categories were direct materials and direct manufacturing labor.

In its third year of operation (2018) BD, added a second product Layered Carrot Cake. The Layered Carrot Cake was also packaged in one-pound units. The product differs from the Raisin Cake in several ways:

More expensive ingredients

More direct manufacturing labor time is required

More complex manufacturing processing is required

In 2018, BD continued to use its traditional cost system, in which it applied manufacturing overhead using total budgeted units (pounds) to be produced for both products.

During 2018, BD’s sales staff reported greater than expected sales of Layered Carrot Cake and less than expected sales of Raisin Cake. The budgeted and actuals sales volume in 2018 is as follows:

	Budgeted	Actual
Raisin Cake	160,000 units (pounds)	120,000 units (pounds)
Layered Carrot Cake	40,000 units (pounds)	80,000 units (pounds)

During 2018, the budged manufacturing overhead was $311,000.

At the end of 2018, Julie Smith, the control of BD decided to investigate how an Activity Based Cost System (ABC) would affect the product cost numbers. After consultation with operating personnel, the single-manufacturing overhead cost pool was subdivided into five activity areas:

Activity	Cost-Application Base	Budgeted Cost	Budgeted Activity
Mixing	Labor - hours	$ 65,000	1,300,000 Labor - hours
Cooking	Oven - hours	75,000	500,000 Oven hours
Cooling	Cool - room hours	16,000	800,000 Cool - room hours
Creaming/Icing	Machine - hours	75,000	300,000 Machine - hours
Packaging	Machine - hours	80,000	1,000,000 Machine hours
	Total Budgeted Overhead =	$ 311,000

Actual Data regarding the 2018 manufacture of Raisin Cake and Layered Carrot Cake is as follows. Assume there were no beginning or ending inventories either products.

		Raisin Cake	Layered Carrot Cake
Mixing	Labor-hours	600,000	640,000
Cooking	Oven-hours	240,000	240,000
Cooling	Cool-room hours	360,000	400,000
Creaming/Icing	Machine-hours	-0-	240,000
Packaging	Machine-hours	360,000	560,000

Required:

1. Compute the budgeted manufacturing overhead per unit (pound) for Raisin Cake and Layered Carrot Cake using the traditional cost system that BD used in 2016 and 2017.

2. Compute the 2018 unit-product cost per unit (pound) for Raisin Cake and Layered Carrot Cake using the traditional cost system used by BD in 2016 and 2017. This would include direct materials, direct labor and manufacturing overhead.

3. Compute the estimated sales price per unit (pound) for Raisin Cake and Layered Carrot Cake using the traditional cost system used by BD in 2016 and 2017. Assume the sales price will be 30% above its cost.

4. Compute the Budgeted rate per cost-application base for the five activity areas. Assume ABC costing is implemented in 2018.

5. Compute the 2018 unit product cost per unit (pound) for Raisin Cake and Layered Carrot Cake using the ABC system. The unit cost should be the sum of the direct material, direct labor and the five activities. To give you a hint on the computation of the unit cost I have demonstrated how to compute the unit cost for the mixing activity for Raisin Cake.

Budgeted Rate per Application Base – Mixing Activity
Mixing – Total cost mixing cost $65,000/1,300,000 labor hours = .05 per hour

                                                                                                                                            

Computation of the Unit Cost of the Mixing Activity for Raisin Cake
$.05 per hour * Raising Cake labor hours = 600,000 = $30,000 total cost/ units produced $120,000= $.25 per unit

6. Computed the estimated sales price per pound for Raisin Cake and Layered Carrot Cake using the ABC system with a 30% Markup.

7. Explain the differences in the unit product costs in part 2 and 5. Why do you think BD produced less raisin cake than was budgeted? Why do you think BD produced more of the Layered Carrot Cake than what was budgeted?

8. Discuss some of the advantages and disadvantages of using the ABC System for BD.

Answer 1