Cakey Bakey Trading (CBT) has been in food manufacturing business for two years since 2018. During its first year of establishment, its only product was Butter Cake. All cakes are baked and packaged in one-kilogram boxes. CBT uses simple costing system with two direct cost categories (direct materials and direct manufacturing labour). Manufacturing overhead was allocated to products using units of production as the allocation base.

During its second year of operation, CBT introduced another product, Pineapple Layer Cake, which was also packaged in one-kilogram boxes. The product differs from Butter Cake in which more expensive ingredients are used, more direct manufacturing labour time is required and more complex manufacturing processing is used. In 2019, CBT continued using its simple costing system in which units of production is used to allocate manufacturing overhead of both products.

For 2019, the company has estimated that it will incur RM421,600.00 in manufacturing overhead cost and produce 160,000 boxes of Butter Cake and 40,000 boxes of Pineapple Layer Cake. The Butter Cake required 0.014 hours of direct labour time per box while the Pineapple Layer Cake required 0.02 hours. Materials and labour costs per one-kilogram box are as follows:

Cost Butter Cake RM Pineapple Layer Cake RM

Direct materials 1.20 1.80

Direct labour 0.28 0.40

Since the introduction of the new product, the companys profits have steadily declined despite sales have been increasing rapidly. Management has become increasingly concerned about the accuracy of its costing system. Ms. Alice, who is in charge of costing for CBT decided to 3 investigate the possibility of adopting activity-based costing method. After conducting a thorough discussion with operating personnel, the single manufacturing overhead cost pool was then divided into four activity areas. The following details are given:

Activity Cost Pool Cost Driver Estimated Percentage of Overhead Cost Expected Activity

Butter Cake Pineapple Layer Cake

Mixing Labour hours 30% 600 640

Baking Oven hours 45% 64,000 86,000

Creaming Machine hours 15% 36,000 84,000

Packaging Packaging hours 10% 24,000 8,000

Required:

a. Compute the product cost per unit of Butter Cake and Pineapple Layer Cake using the simple costing system.

b. Compute the product cost per unit of Butter Cake and Pineapple Layer Cake using the activity-based costing system.

c. Discuss two (2) reasons that may contribute to CBTs declining profits.