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 the sugar substitute. The direct costs of producing the two products are as follows: Sugar Sugar SubstituteDirect materials$0.02 $0.04 Direct labor 0.04 0.08 Overhead is currently assigned to the two products based on machine hours. The following information is provided regarding overhead costs:Activity Traceable Costs Cost Driver Sugar Line Sugar Sub. Line TotalSetup $50,000 No. of setups 125 125 250 Packing 120,000 No. of machine hrs. 10,000 40,000 50,000 Inspection 30,000 No. of

Question

batches  250   350   600   $200,000                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.

What will be an ideal response?

Answer 1

1) Allocation rate based on machine hours:
Total overhead/Total machine hours = $200,000/50,000 = $4.00 per machine hour
Total overhead assigned:
Sugar: $4.00 × 10,000 = $40,000
Sugar Substitute: $4.00 × 40,000 = $160,000

2) Allocation rate based on ABC:
Setup $50,000/250 = $200 per setup
Packing $120,000/50,000 = $2.40 per machine hour
Inspection $30,000/600 = $50 per inspection
Total overhead assigned: