Aunt Ethel's Fancy Cookie Company Manufactures and Sells Three Flavours

Essay

Aunt Ethel's Fancy Cookie Company manufactures and sells three flavours of biscuits: Macaroon,Sugar and Buttercream.The batch size for the biscuits is limited to 1000 biscuits based on the size of the ovens and biscuit moulds owned by the company.Based on budgetary projections,the information listed below is available:
$\begin{array}{llll}&\text { Macaroon }& \text { Sugar }& \text { Buttercream }\\\text { Projected sales in units } & 500000 & 800000 & 600000\\\\\text { PER UNIT data: }\\\text { Selling price } & \$ 0.80 & \$ 0.75 & \$ 0.60 \\\\\text { Direct materials } & & & \\\text { Direct labour } & \$ 0.20 & \$ 0.15 & \$ 0.14 \\\end{array}$

$\text { Hours per } 1000 \text {-unit batch: }$
$\begin{array}{lccc}\text { Direct labour hours } & 2 & 1 &1 \\ \text { Oven hours } & 1 & 1 &1 \\ \text { Packaging hours } & 0.5 & 0.5 & 0.5 \\\end{array}$


Total overhead costs and activity levels for the year are estimated as follows:
$\begin{array} { l r r } \text { Activity } & \text { Overhead costs } & \text { Activity levels } \\ \text { Direct labour } & & 2400 \text { hours } \\ \text { Oven } \$ 210000 & & 1900 \text { oven hours } \\ \text { Packaging } & \$ 150000 & 950 \text { packaging hours } \\ & \$ 360000 & \end{array}$
Required:
a.Determine the activity-cost-driver rate for packaging costs.
b.Using the ABC system,for the sugar biscuit:
1.compute the estimated overhead costs per thousand biscuits
2.compute the estimated operating profit per thousand biscuits.
c.Using a traditional system (with direct labour hours as the overhead allocation base),for the sugar biscuit:
1.compute the estimated overhead costs per thousand biscuits
2.compute the estimated operating profit per thousand biscuits.
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?
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