Activity-Based Costing ~ Product Costing Cross-Subsidization

Bakers Delight (BD) has been in the food processing business for three years. For its first two years, its sole product was raisin cake. All cakes were manufactured and packaged in one-pound units. BDs cost system included two direct-cost categories -- direct materials and direct manufacturing labor. The sole indirect manufacturing cost category manufacturing overhead was allocated to products using units of production as the allocation base.

In its third year (i.e., Y3), BD added a second productlayered carrot cakewhich was packaged in one-pound units. This product differs from raisin cake in several ways:

More expensive ingredients are used

More direct manufacturing labor time is required

More-complex manufacturing processing is required

In Y3, BD continued to use its existing costing system, in which it allocated manufacturing overhead using total units produced of raisin and layered carrot cakes. Direct materials costs were $0.60 per pound of raisin cake and $0.90 per pound of layered carrot cake. In addition, direct manufacturing labor costs were $0.14 per pound of raisin cake and $0.20 per pound of layered carrot cake.

Towards the end of Y3, BD sales staff reported greater-than-expected sales of layered carrot cake and less-than-expected sales of raisin cake. The budgeted and actual sales volumes for the year are as follows:

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

Assume that the budgeted manufacturing overhead for Y3 is $210,800.

1.Before analyzing any data, what (if any) observations in the exercise suggest that Baker might benefit from investing in a cost system that is relatively more sophisticated than its existing cost system?

2.Compute the unit-product cost of raisin cake and layered carrot cake under the existing costing system (i.e., the system that was used during Bakers first two years).

During Y3, Jonathan Davis, the controller of BD, decided to investigate how an activity-based costing system would affect the reported product cost numbers. After consultation with operating personnel, the single manufacturing overhead cost pool was subdivided into five activity areas. These activity areas, the OH cost percentages, the cost-allocation base (or driver), the budgeted Y3 cost-allocation base consumption, the budgeted Y3 cost-allocation rate (left blank for you to calculate), and the quantity of the cost-allocation base actually consumed by the raisin and layered carrot cake product lines are as follows:

					Quantity of Cost Allocation Base Consumed
Activity	OH Cost %a	Cost-Allocation Base	Budgeted Y3 Cost-Allocation Base Consumption	Budgeted Y3 Cost-Allocation Base Rate	Raisin Cake	Layered Carrot Cake
Mixing	20	Labor-hours	1,054,000	$ 0.____	600,000	640,000
Cooking	10	Oven-hours	150,571	$ 0.____	240,000	240,000
Cooling	23	Cool room-hours	2,424,200	$ 0.____	360,000	400,000
Creaming/Icing	17	Machine-hours	143,344	$ 0.____	0	240,000
Packaging	30	Machine-hours	790,500	$ 0.____	360,000	560,000

^a OH Cost % represents the percentage of total budgeted OH costs that is estimated to be associated with a given activity area. For example, 20% of total budgeted OH cost is judged to be associated with the mixing activity.

3.Compute the Y3 unit-product cost of raisin cake and layered carrot cake under the activity-based costing system.

4.Explain the differences in reported unit-product costs computed in requirements 2 and

5.Describe three uses Bakers Delight might make of the activity-based cost numbers.