Question
Pies and sweets limited is a medium-sized bakery selling mainly supermarket chains. It produces two types of pie, plain and game. Although both pies are
Pies and sweets limited is a medium-sized bakery selling mainly supermarket chains. It produces two types of pie, plain and game. Although both pies are the same size, the plain pie has our plain crust but the game pie has a lattice-work crust and more expensive ingredients. As the bakery is highly automated, its current costing system uses raw materials as the only direct cost. It attaches production overhead to both products equally per batch, using the number of batches baked in total as the single plant-wide base. Each oven firing produces one batch of pies.
Anna, the owner-manager has noticed that last year the sales of plain pies were significantly lower than expected but the sales of game pies were significantly higher. The selling pies are arrived at by doubling the total production cost prices. However, Anna is wondering if she has got her pricing right. Her accountant assures her that the costing system is working correctly but one of her work-experience students has questioned the way in which the system operates. It seems illogical to her that game pie which is more complicated to make receives the same amount of overhead as the plain pie. She suggested that Anna should look at something called activity-based costing.
The following figures are from this year's budget:
Budgeted output (Batches) | Cost of ingredients (Per Batch) | Weight of ingredients (Per batch) | Preparation time (Per batch) | Baking time (Per batch) | |
Plain pie | 700 | 120 | 200 kg | 1.8 hours | 3 hours |
Game pie | 350 | 180 | 250 kg | 2.12 hours | 2.57 hours |
Together with her student, Anna investigates the current cost structure and produces the following information:
Overhead activity | Budget Cost | Cost Driver |
Pie preparation | 316,200 | Weight of ingredients |
Oven preparation | 16,674 | Number of firings (number of batches) |
Baking | 24,000 | Number of oven hours |
Other | 126,126 | Batch preparation time |
Total | 483,000 |
Q1: Using the current single plantwide system, calculate the production cost for one batch of each type of pie
Q2: Using activity-based costing, calculate the product cost for one batchof each type of pie
Q3: Compare the results and advise Anna whether or not she should replace her current costing system with an activity-based costing system
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