Question: Flavor land Brands packages single sized servings of sugar and sugar substitute for fast food restaurants. The activities needed to package sugar are fewer & less complex than for sugar substitute. The direct price of producing the two products is as follows;
|
|
Sugar
|
Sugar Substitute
|
|
Direct materials
|
$0.01
|
$0.02
|
|
Direct labor
|
$0.02
|
$0.04
|
Overhead is currently assigned to the two products on the basis of machine hours. The following data is provided regarding overhead costs:
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COST DRIVER DATA
|
|
ACTIVITY
|
TRACEABLE
|
COST
|
SUGAR
|
SUGAR
|
|
|
|
COSTS
|
DRIVER
|
LINE
|
SUB LINE
|
TOTAL
|
|
Setup
|
$75,000
|
Number of setups
|
50
|
100
|
150
|
|
|
|
|
|
|
|
|
Packing
|
$125,000
|
Number of machine hours
|
10,000
|
15,000
|
25,000
|
|
|
|
|
|
|
|
|
Inspection
|
$25,000
|
Number of batches
|
200
|
300
|
500
|
Required
[A] Calculate the predetermined overhead rate under the current method of overhead cost allocation. How much total overhead cost will be assigned to each product under the current system?
[B] Calculate the three (3) activity rates that would be used in an activity-based system. How much total overhead cost will be assigned to each product under an ABC system?
[C] Suppose an ABC system to be more precise, by how much does the firm's current costing system over or under cost the products? Be specific.