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).
Answer: Rate = Packaging cost = $ 150,000
Packaging hrs 950hrs Rate = $ 157.89

2. Using the ABC system, for the sugar cookie, compute the estimated overhead costs per 1,000 cookies (three points).
Answer: Number of batches= units of Sugar cookies =600,00 = 600 batches 1000-unit batch 1,000 Oven ($120,000/1900hrs=$63.1579 x 1 hr) $ 63.1579 Packaging ($150,000/950hrs=$157.8947x0.50hrs) $ 78.9574 Overhead cost per 1000 cookies $ 142.11 3. Using the ABC system, for the sugar cookie, compute the estimated operating profit per 1,000 cookies (three points).
Answer:
Selling price ($0.60x1,000) $ 600.00
Direct materials ($0.14x1,000) $ 140.00
Direct labor ($0.02x,1000) $ 20.00
Factory Overhead (refer #2 solution) $ 142.11 ($ 302.11)
Operating Profit per 1000 cookies $ 297.89

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).
Answer:
Factory Overhead Cost $ 270,000.00
/Labor hrs / 2,400hrs 112.50
Labor hr per 1000-unit batch X 1hr
Overhead Cost per 1000 cookies $ 112.50 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).
Answer:
Selling price ($0.60x1,000) $ 600.00
Direct materials ($0.14x1,000) $ 140.00
Direct labor ($0.02x,1000) $ 20.00
Factory Overhead (refer #4 solution) $ 112.50 ($ 272.50)
Operating Profit per 1000 cookies $327.50 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).
Answer:
Profit obtained from traditional system ($327.50) and ABC system (P$297.89) are different because in ABC system the products do not all require the same proportionate shares of the overhead resources of oven hours and packaging hours unlike in traditional system wh allocates overhead costs on the basis of dire ct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from 1000-unit batch of sugar cookie provided that the activity measures are fairly estimated.