Answer to Question 1
Answer:
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.
Answer to Question 2
T