INSTITUTE OF MANAGEMENT TECHNOLOGY GHAZIABAD

Post-Graduate Diploma in Management – BFS

Question 1
Baker’s Delight (BD) is active in the food-processing business and produces two types of cakes: Raisin
Cake and Layered Carrot Cake. All cakes are manufactured and packaged in 1-pound units. BD uses a
normal costing system. The two direct cost categories are direct materials and direct manufacturing
labor. The sole indirect manufacturing cost category – manufacturing overhead – was allocated to
products using total units of production of raisin and layered carrot cakes as the allocation base.

Direct material costs in 2011 were $0.60 pound of raisin cake and $0.90 per pound of layered carrot
cake. Direct manufacturing labor costs in 2011 were $0.14 per pound of raisin cake and $0.20 per
pound of layered carrot cake.

During 2011, BD sales staff reported greater-than-expected sales of layered carrot cake and less-
than-expected sales of raisin cake. The budgeted and actual sales volume for 2011 is as follows:

Budgeted Actual
Raisin cake 160,000 pounds 120,000 pounds

Layered carrot cake 40,000 pounds 80,000 pounds

The budgeted manufacturing overhead for 2011 is $210,800.

Required

1. What is the budgeted manufacturing overhead rate in 2011?

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 2. What is the total manufacturing overhead allocated to raisin cake and layered carrot cake in
2011?

3. Compute the 2011 unit-product cost of raisin cake and layered carrot cake.

Question 2
Dunant Windows is a small, family-owned company that builds specialty wooden windows for local
builders. For years the company has relied on a simple costing system that applies manufacturing
overhead to jobs strictly on the basis of direct labor hours (DLHs) for determining the costs of its
products. The direct labor wage rate is €18 per hour.

However, the company’s president became interested in activity-based costing (ABC). An ABC design
team was put together in collaboration with an external consultant, and within a few months a
prototype system had been developed. The activity cost pools, their activity measures, and practical
capacity are as follows:

Activity Cost Pool Activity Measure Total Activity for the Year

Making windows Direct labor hours 80,000 DLHs

Processing orders Number of orders 1,000 orders

Customer relations Number of customers 200 customers

Other1 N/A N/A

The “processing orders” activity includes order taking from customers, setup, and job scheduling.
The total overhead cost (both manufacturing and non-manufacturing) for the year is €1,180,000 and
includes the following cost items:

Manufacturing overhead costs:

Indirect factory wages € 240,000

Production equipment depreciation 250,000

Other factory costs 110,000

600,000

Selling and administrative expenses:

Administrative salaries 240,000

Office expenses 60,000

Marketing expenses 280,000

580,000
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The “Other” category includes business-sustaining resources unrelated to any of the activities in the costing
system as well as idle capacity resources.

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Total overhead cost € 1,180,000

Based on interviews with employees, the distribution of resource consumption across the activities
has been estimated as follows:

Making Processing Customer Other

Windows Orders Relations

Indirect factory wages 25% 50% 10% 15%

Production equipment depreciation 80% 0% 0% 20%

Other factory costs 40% 0% 0% 60%

Administrative salaries 0% 25% 35% 40%

Office expenses 0% 20% 30% 50%

Marketing expenses 0% 0% 75% 25%

For example, the consultant estimated that the foremen in the factory spend 25% of their time
supervising the production process, 50% supervising setups, and 10% preparing the goods for
delivery to the customer. The remaining 15% is partially spent on miscellaneous departmental tasks
that have little to do with any particular order, and partially reflect the fact that the plant has been
operating below capacity during the past six months.

Management of the company is particularly interested in measuring the profitability of two

Avon Construction Melun Builders

Number of orders during the year 2 3

Total direct labor hours 250 1,500

Total sales € 9,995 € 54,995

Total direct materials € 3,400 € 17,200

Required:

1. Using the company’s traditional costing system, compute the total margin for the windows
ordered by Avon Construction and Melun Builders during the year.
2. Using the ABC system, compute the total margin for the windows ordered by Avon
Construction and Melun Builders during the year.
3. Comment (briefly) on the design of the two costing systems + draw an overview diagram of
each system. Explain why you believe / do not believe that the ABC system provides better
costing information for decision making than the old system.
4. Which management conclusion would you draw from the results?

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 5.

Question 3
Wine Distributors is a wholesaler of wine, buying from wineries and selling to wine stores. Three
different white wines are sold: Chablis, Chardonnay, and Riesling. Here are actual and budgeted
sales data for the month of April.

WINE DISTRIBUTORS
Budgeted and Actual Sales Data
April
Chablis Chardonnay Riesling Total
Actual sales price $7.00 $8.25 $6.75
Actual quantity 9,880 4,420 11,700 26,000
Standard sale price $7.25 $8.10 $7.10
Standard quantity 8,000 6,000 11,000 25,000

Requirements:

1. Compute the different types of sales variances.

Good Luck!
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