Question

Nissley Wedding Fantasy Corporation makes very elaborate wedding cakes to order. The owner of the company has provided the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools		Activity Rate
Size-related	$	1.13	per guest
Complexity-related	$	28.22	per tier
Order-related	$	74.72	per order

The measure of activity for the size-related activity cost pool is the number of planned guests at the wedding reception. The greater the number of guests, the larger the cake. The measure of complexity is the number of tiers in the cake. The activity measure for the order-related cost pool is the number of orders. (Each wedding involves one order.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately.

Data concerning two recent orders appear below:

	Tijerina Wedding		Twersky Wedding
Number of reception guests		49		126
Number of tiers on the cake		2		4
Cost of purchased decorations for cake	$	28.60	$	54.64

Suppose that the company decides that the present activity-based costing system is too complex and that all costs (except for the costs of purchased decorations) should be allocated on the basis of the number of guests. In that event, what would you expect to happen to the costs of cakes?

Multiple Choice

• The costs of all cakes would go up.

• The costs of all cakes would go down.

• The cost of cakes for receptions with more than the average number of guests would go down.

• The cost of cakes for receptions with fewer than the average number of guests would go down.

Answer 1

THE ANSWER WILL BE SOLVED AFTER CONSIDERING THE FOLLOWING CALCULATIONS.

Particulars	No. of Persons	Cost per (2)	Tijerina Wedding	Twersky Wedding
No. of Guests	49 / 126	$ 1.13	$ 55.37	$ 142.38
No. of tiers	2 / 4	$ 28.22	$ 56.44	$ 112.88
No. of Orders	1 / 1	$ 74.72	$ 74.72	$ 74.72
Cos of decors.	--		$ 28.60	$ 54.64
Total		$ 104.07	$ 215.13	$ 384.62

Avg no of Guests

49+126 ÷ 2 = 87.5

Now, we consider the total cost per guest in both weddings

Tijerina Wedding = $ 215.13 ÷ 49 persons = $ 4.390

Twersky Wedding = $ 384.62 ÷ 126 persons = $ 3.052

Cost per cake will be in where the no. of guests are below/above the average.

Tijerina Wedding (below average) = ($4.390 x 87.5 persons) = $ 384.125

Twersky Wedding (above average) = ($3.052 x 87.5 persons) = $ 267.05.

But, the question states to leave decoration costs are separately charged hence; cost of cake allocated on the basis of average guest is as follows,

Cost of cakes except decorations & the total coast per guest

Tijerina Wedding = $ (55.37 + 56.44 + 74.72) = $ 186.53

                               $ 186.53 ÷ 49 = $ 3.806

Twersky Wedding = $ (142.38 + 112.88 + 74.72) = $ 329.98

                                $ 329.98 ÷ 126 = $ 2.619

Now, the total cost per guest will be where the no. of guests are below/above the average.

Tijerina Wedding (below average) = $ 3.806 x 87.5 persons = $ 333.025.

Twersky Wedding (above average) = $ 2.619 x 87.5 persons = $ 229.1625.

Hence we see that the Cost of cakes for receptions with more than average number of guests goes down, than receptions with fewer than average number of guests. (without considering cost of decorations)

Answer: OPTION C: The cost of cakes for receptions with more than the average number of guests would go down.