Crect 5-42 Activity-based costing, product-cost cross-subsidization. Ever Bake (EB) has been in the food processing business...

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Crect 5-42 Activity-based costing, product-cost cross-subsidization. Ever Bake (EB) has been in the food processing business for three years. For its first two years (year 1 and year 2), its sole product was raisin cake. All cakes were manufactured and packaged in one-kg units. EB used a normal costing indirect manufacturing cost category-manufacturing overhead-was allocated to products using units system. The two direct-cost categories were direct materials and direct manufacturing labor. The sole of production as the allocation base. In its year 3, EB added a second product-layered carrot cake-which was packaged in one-kg units. 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 year 3, EB continued to use its existing costing system, in which it allocated manufacturing overhead using total units produced of raisin and layered carrot cakes. cake. Direct manufacturing labor cost in year 3 was 28 per kg of raisin cake and 240 per kg layered Direct materials, costs in year 3 were 120 per kg of raisin cake and 180 per kg of layered carrot carrot cake. cake and less-than-expected sales of raisin cake. The budgeted and actual sales volume for year 3 is as follows: Raisin cake Layered carrot cake Budgeted 1,60,000 kgs 40,000 kgs The budgeted manufacturing overhead for year 3 is *42,16,000. Actual 1,20,000 kgs 80,000 kgs At the end of year 3, Manish, the controller of EB, decided to investigate how an activity-based costing system would affect 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- allocation base, the budgeted year 3 cost-allocation rate, and the quantity of the cost-allocation base used by the raisin and layered carrot cakes are as follows: Cost-allocation Base Budgeted Year 3 Cost per Unit of Cost-allocation Quantity of Cost- Allocation Base Layered Raising Cake Activity Carrot Cake Base Mixing Labor-hours 0.80 6,00,000 6,40,000 Cooking Over-hours 2.80 2,40,000 2,40,000 Cooling Cool room-hours 0.40 3,60,000 4,00,000 Creaming/Icing Machine-hours 5.00 0 2,40,000 Packaging Machine-hours 1.60 3,60,000 5,60,000 1. Compute the year 3 unit-product cost of raisin cake and layered carrot cake using the existing costing system used in the year 3 to year 3 period. 2. Compute the year 3 unit-product cost of raisin cake and layered carrot cake using the activity- based costing system. 3. Explain the differences in unit-product costs computed in requirements 1 and 2. 4. Describe three uses Ever Bake might make of the activity-based cost numbers. Crect 5-42 Activity-based costing, product-cost cross-subsidization. Ever Bake (EB) has been in the food processing business for three years. For its first two years (year 1 and year 2), its sole product was raisin cake. All cakes were manufactured and packaged in one-kg units. EB used a normal costing indirect manufacturing cost category-manufacturing overhead-was allocated to products using units system. The two direct-cost categories were direct materials and direct manufacturing labor. The sole of production as the allocation base. In its year 3, EB added a second product-layered carrot cake-which was packaged in one-kg units. 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 year 3, EB continued to use its existing costing system, in which it allocated manufacturing overhead using total units produced of raisin and layered carrot cakes. cake. Direct manufacturing labor cost in year 3 was 28 per kg of raisin cake and 240 per kg layered Direct materials, costs in year 3 were 120 per kg of raisin cake and 180 per kg of layered carrot carrot cake. cake and less-than-expected sales of raisin cake. The budgeted and actual sales volume for year 3 is as follows: Raisin cake Layered carrot cake Budgeted 1,60,000 kgs 40,000 kgs The budgeted manufacturing overhead for year 3 is *42,16,000. Actual 1,20,000 kgs 80,000 kgs At the end of year 3, Manish, the controller of EB, decided to investigate how an activity-based costing system would affect 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- allocation base, the budgeted year 3 cost-allocation rate, and the quantity of the cost-allocation base used by the raisin and layered carrot cakes are as follows: Cost-allocation Base Budgeted Year 3 Cost per Unit of Cost-allocation Quantity of Cost- Allocation Base Layered Raising Cake Activity Carrot Cake Base Mixing Labor-hours 0.80 6,00,000 6,40,000 Cooking Over-hours 2.80 2,40,000 2,40,000 Cooling Cool room-hours 0.40 3,60,000 4,00,000 Creaming/Icing Machine-hours 5.00 0 2,40,000 Packaging Machine-hours 1.60 3,60,000 5,60,000 1. Compute the year 3 unit-product cost of raisin cake and layered carrot cake using the existing costing system used in the year 3 to year 3 period. 2. Compute the year 3 unit-product cost of raisin cake and layered carrot cake using the activity- based costing system. 3. Explain the differences in unit-product costs computed in requirements 1 and 2. 4. Describe three uses Ever Bake might make of the activity-based cost numbers.