Machine hours or direct labor is not always used by companies as it may not be the appropriate cost driver for overhead in all cases, due to the complexity of the manufacturing processes. Some companies consider Activity Based Costing (ABC) as a better alternative. ABC uses multiple cost drivers rather than just one, to apply overhead to the various activities. Using ABC, a company can use the cost driver that has the best cause/effect relationship in its applied overhead costs.

Sweet Wave Bakery looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below are a sample of possible cost pools for Waterways.

Assembling

Payroll

Billing

Plant Supervision

Mixing

Product design

Janitorial

Purchasing materials

Machine maintenance

Selling

Machine setups

Testing

Dough

Baking

Packaging

QUESTION 1

For each of these cost pools, what would be the likely activity cost driver?

In order to properly track costs, Sweet Wave Bakery uses very stringent standard costs in evaluating efficiency. Management is working hard to make these costs precise, but they have not yet achieved this goal. Currently, they use the following standards:

Materials Item Per unit Cost Flour 1 lb. 63c per lb. Sugar 12 oz. $1.00 per lb. Butter 4 oz. 88c per lb. Direct Labor Item Per unit Cost Labor 15 min. $8.00 per hr