Question 19 Danbake Limited is a medium-sized bakery selling mainly to supermarket chains. It produces two types of pie: pork and game. Although both pies are the same size, the pork pie has a plain crust but the game pie has a lattice-work crust and more expensive ingredients. As the bakery is highly automated, its absorption costing system uses raw materials as the only direct cost. It attaches production overheads to both products equally per batch, using the number of batches baked in total as the absorption base. Each oven firing produces one batch of pies. Dan, the owner-manager, has noticed that last year the sales of pork pies were significantly lower than expected but the sales of game pies were significantly higher. The selling prices are arrived at by doubling the total production cost prices. But Dan is wondering if he has got his pricing right. His accountant assures him that the costing system is working correctly but one of his work- experience students has questioned the way in which the system operates. It seems illogical to her that a game pie, which is more complicated to make, receives the same amount of overhead as a pork pie. She suggests that Dan should look at something called 'activity-based costing'. The following figures are from this year's budget: Budgeted Cost of Weight of Preparation Baking time Output ingredients ingredients time (per batch) (batches) (per batch) (per batch) (per batch) Pork pie 700 200 kg 1.80 hours 3.00 hours Game pie 350 2180 250kg 2.12 hours 2.57 hours Together with his student, Dan investigates the current cost structure and produces the following information: Overhead activity Budgeted cost (f) Cost driver Pie preparation 316,200 Weight of Ingredients Oven preparation 16, 674 Number of firings Baking 24, 000 Number of oven hours Other 126,126 Batch preparation time Total $483, 000 Required: a) Using the current absorption costing system, calculate the production cost and selling price for one batch of each type of pie. b) Using activity-based costing, calculate the production cost and selling price for one batch of each type of pie