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 (three points).
Using the ABC system, for the sugar cookie, compute the estimated overhead costs per 1,000 cookies (three points).
Using the ABC system, for the sugar cookie, compute the estimated operating profit per 1,000 cookies (three points).
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 (three points).
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 (3 points).
Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why? (three points).
Problem 2: What is activity-based management and how can it be used to improve the profitability of a company? (12 points)
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