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:
Macaroon Sugar Buttercream
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 1000-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 $210,000 1,900 oven hours
Packaging $150,000 950 packaging hours
$360,000
Required:
a. Determine the activity-cost-driver rate for packaging costs.
b. Using the ABC system, for the sugar cookie:
1. compute the estimated overhead costs per thousand cookies.
2. compute the estimated operating profit per thousand cookies.
c. Using a traditional system (with direct labor hours as the overhead allocation base), for the sugar cookie:.
1. compute the estimated overhead costs per thousand cookies.
2. compute the estimated operating profit per thousand cookies.
d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?