Nissley Wedding Fantasy Corporation makes very elaborate wedding cakes to order. The owner of the company has provided the following data concerning the activity rates in its activity-based costing system:
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Nissley Wedding Fantasy Corporation makes very elaborate wedding cakes to order. The owner of the company has provided the following data concerning the activity rates in its activity-based costing system:
|
|
Activity Cost Pool |
Activity Rate |
|
|
|
Size-related................... |
$1.13 |
per guest |
|
|
Complexity-related......... |
$28.22 |
per tier |
|
|
Order-related................. |
$74.72 |
per order |
The measure of activity for the size-related activity cost pool is the number of planned guests at the wedding reception. The greater the number of guests, the larger the cake. The measure of complexity is the number of tiers in the cake. The activity measure for the order-related cost pool is the number of orders. (Each wedding involves one order.) 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:
|
|
|
Tijerina |
Twersky |
|
|
|
Wedding |
Wedding |
|
|
Number of reception guests........................ |
49 |
126 |
|
|
Number of tiers on the cake........................ |
2 |
4 |
|
|
Cost of purchased decorations for cake...... |
$28.60 |
$54.64 |
Suppose that the company decides that the present activity-based costing system is too complex and that all costs (except for the costs of purchased decorations) should be allocated on the basis of the number of guests. In that event, what would you expect to happen to the costs of cakes?
- A) The costs of all cakes would go up.
- B) The cost of cakes for receptions with fewer than the average number of guests would go down.
- C) The cost of cakes for receptions with more than the average number of guests would go down.
- D) The costs of all cakes would go down.
The answer is (B). Please explain it thoroughly. Is the average number of guests equals 88 guests?
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