Waffle Delight and Differing Approaches to Cost Determination

Waffle Delight has been in the food-processing industry for four years. For its first three years of operations (Years 1, 2 and 3), it only produced one product: the Belgian Waffle (BW). All waffles were factory made and packaged in 1 kg units. A traditional absorption costing system was used by Waffle Delight. The company initially operated the business by using a simple manufacturing cost structure, consisting of direct materials and direct manufacturing labour, and indirect costs. The manufacturing indirect costs were absorbed to the waffles using a units of production absorption basis.

In the fourth year of operations (Year 4), Waffle Delight decided to expand its product mix by including a second product in its portfolio a banana, apple and cinnamon (BAC) waffle - also packaged in 1 kg units. This product varies from the Belgian Waffle in a number of ways:

• It requires higher priced ingredients.
• The production of the BAC waffle involves a higher direct manufacturing labour time.
• This second product demands a more complex manufacturing process.

In Year 4, the CEO of Waffle Delight made use of its existing costing system, where a unit of production of either waffle was weighted the same.

Direct materials costs in Year 4 were 0.60 per kg of Belgian Waffle and 0.90 per kg of BAC waffle. Direct manufacturing labour cost in Year 4 was 0.14 per kg of Belgian Waffle and 0.20 per kg of BAC waffle.

During Year 4 the sales team within Waffle Delight reported higher-than-expected sales of BAC waffle and lower-than-expected sales of BW waffles. The budgeted and actual sales volumes for Year 4 can be found below:

	Budgeted (Kg)	Actual (Kg)
Belgian Waffle	1,600	1,200
Banana Apple and Cinnamon Waffle	400	800

The budgeted manufacturing overhead for Year 4 was 2,656.

By the end of Year 4, Waffle Delights accountant had been toying with the idea of using a new costing system for accounting purposes within the company: Activity-Based Costing (ABC). Despite the CEOs reluctance towards this idea, the accountant spent a considerable amount of time with the various departments to identify a way to categorise the manufacturing overhead cost pool into five activity areas. The results of this investigation, based on Year 4 data, for each type of waffle are summarised below:

Activity	Cost Driver	Driver units per kg Belgian Waffle	Driver units per kg of Banana Apple and Cinnamon Waffle
Mixing	Labour Time	5	8
Baking	Oven Time	2	3
Refrigerating	Refrigeration Time	3	5
Glazing	Machine Time	0	3
Packaging	Packaging Time	3	7

It was also identified that the total budgeted manufacturing overhead for Year 4 was made up of the following:

Activity	Total Overhead Cost ()
Mixing	496
Baking	672
Refrigerating	152
Glazing	600
Packaging	736

Required

1. Using the original conventional costing system, calculate the unit product cost in Year 4 of one BW waffle and one BAC waffle. Show your answer to 2 decimal places. In so doing, ensure you show your workings clearly. (12 marks)

Note: within the 12 marks available, 4 marks are allocated for correct figure only unit product costs, based on 2 marks for each product.

2. Using the new activity-based costing (ABC) system, and based on Year 4 data, calculate the unit product cost in Year 4 of one BW waffle and one BAC waffle. Show your answer to 2 decimal places. In so doing, ensure you show your workings clearly. (15 marks)

Note: within the 15 marks available, 4 marks are allocated for correct figure only unit product costs, based on 2 marks for each product.