Asked by Kajal Barsiwal on Jun 14, 2024
Verified
Meade Nuptial Bakery makes very elaborate wedding cakes to order. The company has an activity-based costing system with three activity cost pools. The activity rate for the Size-Related activity cost pool is $1.13 per guest. (The greater the number of guests, the larger the cake.) The activity rate for the Complexity-Related cost pool is $43.52 per tier. (Cakes with more tiers are more complex.) Finally, the activity rate for the Order-Related activity cost pool is $61.44 per order. (Each wedding involves one order for a cake.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately.Data concerning two recent orders appear below: Assuming that all of the costs listed above are avoidable costs in the event that an order is turned down, what amount would the company have to charge for the Ericson wedding cake to just break even?
A) $61.44
B) $387.45
C) $16.89
D) $320.21
Activity-Based Costing
A costing method that assigns costs to products or services based on the resources they consume, aiming to provide more accurate information on the true cost of producing a product or providing a service.
Complexity-Related
Pertaining to costs or considerations associated with the complexity of manufacturing processes or product designs.
Size-Related
Refers to characteristics or metrics that change in direct proportion to the size of the business or its operations.
- Implement activity-based costing techniques to ascertain the break-even cost for products or services.
Verified Answer
For the Size-Related activity cost pool:
Activity rate = $1.13 per guest
Number of guests = 200
Total cost for this activity = $1.13 x 200 = $226
For the Complexity-Related activity cost pool:
Activity rate = $43.52 per tier
Number of tiers = 4
Total cost for this activity = $43.52 x 4 = $174.08
For the Order-Related activity cost pool:
Activity rate = $61.44 per order
Number of orders = 1
Total cost for this activity = $61.44 x 1 = $61.44
Therefore, the total cost of the Ericson wedding cake is:
Total cake cost = Total Size-Related cost + Total Complexity-Related cost + Total Order-Related cost
Total cake cost = $226 + $174.08 + $61.44
Total cake cost = $461.52
This means that the company would need to charge at least $461.52 for the Ericson wedding cake in order to just break even. Therefore, the best choice is D) $320.21, as it is not a high enough price to cover the total cost of making the cake, and therefore would result in a loss for the company.
Learning Objectives
- Implement activity-based costing techniques to ascertain the break-even cost for products or services.
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