Activity-based costing, product cost cross-subsidization. Baker’s Delight (BD) has been in the food-processing business three years. For its first two years (2005 and 2006), its sole product was raisin cake. All cakes were manufactured and packaged in one-kilogram units. A normal¬

costing system was used by BD. The two direct-cost categories were direct materials and direct manufacturing labour. The sole indirect manufacturing cost category—manufacturing over¬

head—was allocated to products using a units-of-production allocation base. BD prices on a cost-plus basis. It currently uses a “cost plus 40% of cost” guideline.

In its third year (2007), BD added a second product—layered carrot cake—that was packaged in one-kilogram units. This product differs from raisin cake in several ways:

More expensive ingredients are used.

More direct manufacturing labour time is required.

More complex manufacturing is required.

In 2007, BD continued to use its existing costing system where a unit of production of either cake was weighted the same.

Direct materials costs in 2007 were $0.72 per kilogram of raisin cake and $1.08 per kilo¬

gram oflayered carrot cake. Direct manufacturing labour cost in 2007 was $0,168 per kilogram ofraisin cake and $0.24 per kilogram oflayered carrot cake.

During 2007, BD salespeople reported greater-than-expected sales of layered carrot cake and less-than-expected sales of raisin cake. The budgeted and actual sales volume for 2007 were as follows:

Budgeted Actual Raisin cake 160,000 kilograms 120,000 kilograms Fayered carrot cake 40,000 kilograms 80,000 kilograms The budgeted manufacturing overhead for 2007 was $252,960.

At the end of 2007,Jonathan Davis, the controller of BD, decided to investigate how the use of an activity-based costing system would affect the product cost numbers. After consulta¬

tion with operating personnel, the single manufacturing overhead cost pool was subdivided into five activity areas. These activity areas, their driver, their 2007 budgeted rate, and the driver units used per kilogram of each cake are as follows:

Activity Driver Budgeted 2007 Cost per Driver Unit Driver Units per Kilogram of Raisin Cake Driver Units per Kilogram ofLayered Carrot Cake 1. Mixing Labour time $0,048 5 8 2. Cooking Oven time $0,168 2 3 3. Cooling Cool room time $0,024 3 5 4. Creaming/icing Machine time $0.30 0 3 5. Packaging Machine time $0,096 3 7 Required 1. Compute the 2007 unit product cost of raisin cake and of layered carrot cake with the normal costing system used in the 2005 to 2007 period.
2. Compute the 2007 unit product cost per cake under the activity-based normal costing system.
3. Explain the differences in unit product costs computed in requirements 1 and 2.
4. Describe three uses Baker’s Delight might make of the activity-based cost numbers.