Originally Posted by lcheng
Baker's delight (BD) has been in the food processing business three years. For its first two years (2005 and 2006), its sole product was raisin cake. All cakes were manufactured and packaged in one-pound boxes. BD used a normal costing system. The two direct-cost categories were direct materials and direct manufacturing labor. The sole indirect manufacturing cost category-manufacturing overhead-was allocated to products using pounds of production as the allocation base.
In its third year (2007), BD added a second product-layered carrot cake-which was also packaged in one-pound boxes. 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 2007, BD continued to use its simple costing system, in which it allocated manufacturing overhead using total pound (boxes) produced of raisin and layered carrot cakes. Direct material cost in 2007 was $0.60 per pound of raisin cake and $0.90 per pound of layered carrot cake. Direct manufacturing labor cost in 2007 was $0.14 per pound of raisin cake and $0.20 per pound of layered carrot cake. During 2007, 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 volume for 2007:
Budgeted actual
Raisin cake 160,000 lbs 120,000 lbs
Layered carrot cake 40,000 lbs 80,000 lbs
The budgeted manufacturing overhead for 2007 is $210,800
At the end of 2007, Jonathan Davis, the controller of BD, decided to investigate how an activity based costing system would have affected the product-cost numbers. After consultation with operating personnel, the single manufacturing overhead cost pool was subdivided into five activity areas. These activity areas, the cost-allocated base, the budgeted 2007 cost-allocation rate, and the quantity of the cost-allocation base used by the raisin and layered carrot cakes are as follows:
Activity Cost-allocation budgeted 2007 quantity of cost-allocation base
Base CPU of cost
Allocation base raisin cake layered carrot cake
Mixing labor-hours $.04 600,000 640,000
Cooking Oven-hours $.14 240,000 240,000
Cooling cool room-hours $.02 360,000 400,000
Creaming/icing machine hours $.25 0 240,000
Packaging machine hours $.08 360,000 560,000
Questions
1. Compute the 2007 product cost per pound of raisin cake and layered carrot cake produced using the simple costing system used in the 2005 to 2007 period?
do I use the bugeted predetermine overhead rate? I am not understanding this.
2. Compute the 2007 product cost per pound of raisin cake and layered carrot cake produced using the activity-based costing system?
Do I need to allocated each volume with the cost per unit?