Carsten Wedding Fantasy Company 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 Pools Activity Rate
Size-related 0.75 per guest
Complexity-related 33.44 per tier
Order-related 84.65 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:
Number of reception guests 79 171
Number of tiers on the cake 2 5
Cost of purchased decorations for cake 18.9 58.42
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?
The costs of all cakes would go down.
The cost of cakes for receptions with fewer than the average number of guests would go down.
The costs of all cakes would go up.
The cost of cakes for receptions with more than the average number of guests would go down
The solution explains the change in the cost of cakes if the activity based system is replaced by traditional costing system.