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Social Science Clinic => Accounting => Topic started by: notis on Mar 6, 2021

Title: Aunt Ethel's Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon, Sugar, ...
Post by: notis on Mar 6, 2021

Question 1

The cost data produced by an ABC system for either a service or a product are only derived from indirect costs.
◦ true
◦ false

Question 2

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?

Title: Aunt Ethel's Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon, Sugar, ...
Post by: zoeyesther on Mar 6, 2021

Answer 1

false

Answer 2

a.

activity-cost-driver rate

= packaging overhead / packaging hours

 = $150,000 / 950 hours 
 = $157.89 per packaging hour

b.

 1. To compute the estimated overhead costs for a batch of sugar cookies (using the ABC system), first calculate the activity-cost-driver rate for the oven activity.

 activity-cost-driver rate = oven overhead / oven hours
 = $210,000 / 1,900 hours
 = $110.53 per oven hour

 Then calculate the overhead for a 1,000 cookie batch by multiplying the number of activity hours per batch by the appropriate activity-cost-driver rate for each of the relevant overhead activities and sum to get the total overhead for the batch.
 
 (1 × $110.53) + (.5 × $157.89) = $189.48

 2. To compute the estimated operating profit for a batch of sugar cookies (using the ABC system), subtract the costs from the revenues:

Revenue

= 1,000 × $0.75

= $ 750.00

Direct Material

= 1,000 × $.015

= ($150.00)

Direct Labor

= 1,000 × $.02

= ($  20.00)

Overhead

= ($189.48)

Operating Profit

= $ 390.52

c.  1. To compute the estimated overhead costs for a batch of sugar cookies (using the traditional system), first calculate the overhead rate per direct labor hour.

Overhead per direct labor hour

= Total Overhead / Total Direct Labor Hours

 = $ 360,000 / 2,400 hours
 = $ 150.00 per direct labor hour
 
 Since it takes 1 direct labor hour per 1,000 sugar cookies, the overhead is $150.00

 2. To compute the estimated operating profit for a batch of sugar cookies (using the traditional system), subtract the costs from the revenues:

Revenue

= 1,000 × $0.75

= $ 750.00

Direct Material

= 1,000 × $.015

= ($150.00)

Direct Labor

= 1,000 × $.02

= ($  20.00)

Overhead

= ($150.00)

Operating Profit

= $ 430.00

d.

Traditional system:

Operating profit per batch of sugar cookies is $430.00.

​

ABC system:

Operating profit per batch of sugar cookies is $390.52.

 Because the products do not all require the same proportionate shares of the direct labor resources, the allocation of the total overhead on that basis is not as accurate as using the ABC system. The ABC system allocates the overhead based on activity levels for the specific categories as well as activity usage by the product lines.

Title: Re: Aunt Ethel's Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon, Sug
Post by: Saed Hqer on Apr 7, 2023

Thank you