Lifsey Wedding Fantasy Company makes very elaborate wedding cakes to order. The

Question

Lifsey 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:

Question: 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 answer is

 The cost of cakes for receptions with fewer than the average number of guests would go down.

ok well. How is that an answer? And what's the point with that fewer than the average number of guests?

Explanation / Answer

If the cost is allocated on the basis of number of guests then definitely cost for fewer guest would go down. Cost will vary in direct relation with the number of guests.

See the following details:

Average no. of guests = (72 + 189) / 2 = 130.5 or 131
Total Costs                             Pyburn        Smith
                                              Wedding      Wedding
Size related cost 0.94x72         $67.68          $177.66 (0.94x189)
Complexity Related $31.62x4    $126.48        $158.10 ($31.62x5)
Order-related          $55.79x1    $55.79          $55.79  
                                              ---------------------------
Total Cost                                $249.95        $341.55
                                                       $591.50
                                              ==================
Allocation on the basis of no.
of guests $591.50 x 72/261      $163.17       $428.33 ($591.50x189/261)

The cost reduces from $249.95 to $163.17 (due to number of guests 72 being less than average 131)

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