Lately Twisty Noodles, a regional factory that manufactures various kinds of pasta, has been delighted to experience growth in what has been a challenging economic time for others. They have recently added penne pasta to their current offering of angel hair pasta. As part of their continued efforts to improve their internal processes, management has asked Tom, their accountant, to assist with some analysis. Currently Twisty Noodles utilizes a traditional costing system, but they would like to explore the use of Activity-Based Costing (ABC) since they have expanded their offerings. Tom has identified that they have the following key activities:

Pertinent cost information related to their pasta offerings are as follows:

Under their traditional costing system, Manufacturing Overhead (MOH) is currently assigned to products based on 87% of direct labor costs. Management is very interested to learn whether a switch to ABC will produce more accurate results, and they would like to have some solid numbers to back up their decision. Tom would like to be able to present management with a solid recommendation in the very near future. With this in mind, please complete the following questions.
(If required, round calculations to two decimal places.)
a. What is the cost per unit for each of the identified key activities that would be used under the proposed ABC? How do these values compare to the current calculation using traditional costing?
b. Calculate the total cost per unit for angel hair using both a traditional costing system and ABC.
c. Calculate the total cost per unit for penne using both a traditional costing system and ABC.
d. Why do the two costing systems produce such different results? If you were Tom, which costing system would you encourage Twisty to utilize, and why?
e. The management of Twisty Noodles believes that they may see a 10% increase in production of their products next year. They would also like to consider bringing a new spaghetti pasta to market. How would these events impact the decision which Tom made in part (d)?

Fescue, Inc

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