Costing Question

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:

1.    
Determine the activity-cost-driver rate for packaging costs (three points).

2.    
Using the ABC system, for the sugar cookie, compute the estimated overhead costs per 1,000 cookies (three points).

3.    
Using the ABC system, for the sugar cookie, compute the estimated operating profit per 1,000 cookies (three points).

4.    
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).

5.    
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).

6.    
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)