Risingstar Cookie Company makes and sells three flavours of cookies: Macaroon, Buttercream, and Sugar. Batch size for the cookies is limited to 1,000 cookies based on a size of the ovens and cookie molds owned by a company. Based on budgetary projections, the information given below is available:
Macaroon Sugar Butter cream
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 $210,000 2,400 Hours
Oven $150,000 1,900 Oven Hours
Packaging $360,000 950 Packing Hours
1) Find out the activity-cost-driver rate for packaging costs.
2) Using ABC system, for sugar cookie, find out the estimated overhead costs per thousand cookies.
3) Using ABC system, for the sugar cookie, find out the estimated operating profit per thousand cookies.
4) Using traditional system (with direct labor hours as the overhead allocation base) for sugar cookie, find out the estimated overhead costs per thousand cookies.
5) Using a traditional system (with direct labor hours as the overhead allocation base) for the sugar cookie, compute the estimated operating profit per thousand cookies.
6) Describe the difference between profits obtained from the traditional system and the ABC system. Which system gives a better estimate of profitability? describe why?