Q1) Aunt Ethel's Fancy Cookie Company produces and sells three flavors of cookies: Macaroon, Sugar, and Buttercream. Batch size for cookies is limited to 1,000 cookies based on size of ovens and cookie molds owned by company. Based on budgetary projections, information listed below is available:
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Macaroon
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Sugar
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Butter cream
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Projected sales in units
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500,000
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800,000
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600,000
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PER UNIT data:
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Selling price
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$0.80
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$0.75
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$0.60
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Direct materials
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$0.20
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$0.15
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$0.14
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Direct labor
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$0.04
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$0.02
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$0.02
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Hours per 1000-unit batch:
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Direct labor hours
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2
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1
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1
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Oven hours
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1
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1
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1
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Packaging hours
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0.5
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0.5
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0.5
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Total overhead costs and activity levels for the year are estimated as follows:
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Activity
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Overhead costs
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Activity levels
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Direct labor
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$210,000
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2,400 Hours
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Oven
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$150,000
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1,900 Oven Hours
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Packaging
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$360,000
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950 Packing Hours
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1) Find out activity-cost-driver rate for packaging costs.
2) Using ABC system, for sugar cookie, calculate estimated overhead costs per thousand cookies.
3) Using ABC system, for sugar cookie, calculate estimated operating profit per thousand cookies.
4) Using traditional system (with direct labour hours as overhead allocation base) for sugar cookie, calculate estimated overhead costs per thousand cookies.
5) Using traditional system (with direct labour hours as overhead allocation base) for sugar cookie, calculate estimated operating profit per thousand cookies.
6) Describe difference between profits got from traditional system and ABC system. Which system gives better estimate of profitability? Explain why?