Problem 1 . Aunt Ethel\'s Fancy Cookie Company manufactures and sells three flav
ID: 2503184 • Letter: P
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:
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:
1. Suppose Aunt Ethel
Explanation / Answer
a.
activity-cost-driver rate = packaging overhead / packaging hours
= $150,000 / 950 hours
= $157.89 per packaging hour
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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 x $110.53) + (.5 x $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
Operating Profit = $ 390.52
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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
Operating Profit = $ 430.00
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