Problem 1 – Aunt Ethel’s Fancy Cookie Company manufactures and sells three flavors of cookies: macaroon, sugar, and buttercream. The batch size for the cookies is limited to 1,000 cookies based on the size of the ovens and cookie molds owned by the company. Based on budgetary projections, the information listed below is available:
| Buttercream | Macaroon | Sugar | |
|---|---|---|---|
| Projected sales in units | 500,000 | 800,000 | 600,000 |
| PER UNIT data: | |||
| Selling price | $0.80 | $0.75 | $0.60 |
| Direct materials | $0.20 | $0.15 | $0.14 |
| Direct labor | $0.04 | $0.02 | $0.02 |
| Hours per 1,000-unit batch: | |||
|---|---|---|---|
| Direct labor hours | 2 | 1 | 1 |
| Oven hours | 1 | 1 | 1 |
| Packaging hours | 0.5 | 0.5 | 0.5 |
Total overhead costs and activity levels for the year are estimated as follows:
| Activity | Overhead costs | Activity levels |
|---|---|---|
| Direct labor | 2,400 hours | |
| Oven | $120,000 | 1,900 hours |
| Packaging | $150,000 | 950 hours |
| Total | $270,000 |
Questions:
- Determine the activity-cost-driver rate for packaging costs
- Using the ABC system, for the sugar cookie, compute the estimated overhead costs per 1,000 cookies
- Using the ABC system, for the sugar cookie, compute the estimated operating profit per 1,000 cookies
- Using a traditional system (with direct labor hours as the overhead allocation base) for the sugar cookie, compute the estimated overhead costs per 1,000 cookies
- Using a traditional system (with direct labor hours as the overhead allocation base) for the sugar cookie, compute the estimated operating profit per 1,000 cookies
- Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?
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