Question

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 Delight’s 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 CEO’s 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.

Answer 1

vnit BAC product waffle cost using of one Be waffle & conventional costing one system particulars - £0 per kg BW waffle BAC waffle Direct material 0.60 0.90 Labour cost 0.14 0. 20 1-328 1-328 manufacturing over heads . (wNil) 2.068 २.५२8 poroduct cost per kg WN) Budgeted manufacturing over heads- $2656 over heads absorbed Budgeted sales . Bew waffle 1600kgs perky = $2656 2000 - BAC waffle 400 kgs Goook – 01:328 peo kg

calculation over head cost perdoived Activity Douveas Onils perkg Boa waffle BAC Leffle over heads Cost perkg. BAC wattle cost cost using ABC costing Total drivers Bewaffle BAC waffle total C1200kg) (8001093) Cc+d CC) Cd) 1200x5 800X8 = 60ool - Guoo 12400 caxp) (6XP) CE ct) a) (b) 8 5 496 0-04 0-32 0-2 mixing 800X3 0:42 0-28 0.14 200X2 - 2400 Banking 4800 672 =2400 sooxs 0.06 01 0.02 1200X3 7600 Refsigerating 152 3 5 -4000 - 3600 0-75 2400 0.25 برا 600 o Glazing goox3 - 2400 0.24 0.56 7 1200x3 800x7 3 92000-08 packaging 736 - 5600 = 3600 € 0.78 € 2.15 Cost per kg

unit product cost using ABC costing particularis £ per kg naffle BAC waffle BAC BW waffle 0.90 0.6 huo 0.20 Direct material direct labour 0.14 0:32 0.2 mixing cost 0.42 0.28 0.06 Banking cost refrigerating Glazing packaging 0.75 0.24 0-56 Cost per kg € 1.52 £3-25