Sweetheart Brands Packages Single-Sized Servings of Sugar and Sugar Substitute

Essay

Sweetheart Brands packages single-sized servings of sugar and sugar substitute for fast food restaurants. The activities required to package sugar are fewer and less complex than for sugar substitute. The direct costs of producing the two products are as follows:
Overhead is currently assigned to the two products on the basis of machine hours. The following information is provided regarding overhead costs:
Required:
1) Compute the predetermined overhead rate under the current method of overhead cost allocation. How much total overhead cost will be assigned to each product under the current system?
2) Compute the three activity rates that would be used in an activity-based system. How much total overhead cost will be assigned to each product under an ABC system?
3) Assuming an ABC system to be more precise, by how much does the company's current costing system over- or undercost the products? Be specific. $\begin{array}{|l|l|r|}\hline &{\text { Sugar }} &{\text { Sugar Substitute }} \\\hline \text { Direct materials } & \$ 0.02 & \$ 0.04 \\\hline \text { Direct labor } & 0.04 & 0.08\\\hline\end{array}$ $$\begin{array} { | l | r | r | r | r | r | } \hline { \text { Activity } } & \text { Traceable Costs } & \text { Cost Driver } & \text { Sugar Line } & \text { Sugar Sub. Line } & \text { Total } \\\hline \text { Setup } & \$ 50,000 & \text { No. of setups } & 125 & 125 & 250 \\\hline \text { Packing } & 120,000 & \text { No. of machine hrs. } & 10,000 & 40,000 & 50,000 \\\hline \text { Inspection } & 30,000 & \text { No. of batches } & 250 & 350 & 600 \\\hline & \$ 200,000 & & & & \\\hline\end{array}$$