Question
In: Accounting
French Press Coffee Inc. (HFC) processes and distributes a variety of coffees. HFC buys coffee beans...
French Press Coffee Inc. (HFC) processes and distributes a variety of coffees. HFC buys coffee beans from around the world and roasts, blends, and packages them for resale. HFC sells one-pound bags of coffee throughout a series of gourmet shops. the company has low direct labor costs but very high factory overhead.
Data for the 2018 budget includes factory overhead of $2,393,500, which is currently being allocated based on direct labor cost. Budgeted direct labor is $100000.
The budgeted direct costs for a one pound bag of the two most popular coffee blends are as follows:
| Presque Isle Blend | Mentor Headlands blend | |
|
Direct material |
$4.25 | $3.50 |
| Direct labor cost | $0.95 | $0.75 |
The controller believed the current costing system generates misleading information. She has developed the following details:
| Activity | Cost Driver |
Budgeted Cost |
| Purchasing | #Purchase Orders | $474000 |
| Material Handling | #Setups | $638000 |
| Quality Control | #batches | $67500 |
| Roasting | Roasting Hours | $920000 |
| Blending | Blending Hours | $190000 |
| Packaging | Packaging Hours | $103000 |
Total Budgeted cost- $2,392,500
Additional information:
| Presque Isle Blend | Mentor Headlands Blend | |
| Sales in units | $100000 pounds | 5000 pounds |
|
Selling price per unit |
$30 | $24 |
| number of batches | 50 | 5 |
| Number of setups | 3 per batch | 3 per batch |
| purchase orders | 4 | 6 |
| roasting time | 1 hour per 100 pounds | 1 hour per 350 pounds |
| blending time | 0.50 hour per 100 pounds |
0.50 hour per 250 pounds |
| packaging time | 0.20 hour per 1000 pounds | 0.20 hour per 1000 pound |
Required: 1. Assuming manufacturing overhead is allocated based on direct labor costs, calculate the cost per unit of Presque isle blend and mentor headlands blend.
2. Assuming the company uses Activity based costing, calculate the cost per unit of Presque Isle Blend and Mentor Headlands Blend.
3. Calculate Gross Profit for each method of costing.
Solutions
Expert Solution
Answer 1
| Budgeted factory overhead | 2,392,500 | |
| Divided by: Direct labor cost | 100,000 | |
| Overhead allocated based on direct labor cost | 2392.50% | |
| traditional costing | Presque Isle Blend | Mentor Headlands Blend |
| Direct material | 4.25000 | 3.50000 |
| Direct labor cost | 0.95000 | 0.75000 |
| Allocated overhead (Direct labor cost * 2392.50%) | 22.72875 | 17.94375 |
| Cost per unit using traditional method | $ 27.92875 | $ 22.19375 |
Answer 2
| Setup per batch | 3 | 3 |
| Multiply: number of batches | 50 | 5 |
| Setups | 150 | 15 |
| Sales in units | 100,000 | 5,000 |
| Divided by: pounds per roasting hours | 100 | 350 |
| Roasting Hours | 1,000 | 14.29 |
| Sales in units | 100,000 | 5,000 |
| Divided by: pounds per blending hours (100/0.50) and (250/0.50) respectively | 200 | 500 |
| Blending hours | 500 | 10 |
| Sales in units | 100,000 | 5,000 |
| Divided by: pounds per packings hours (1000/0.20) and (1000/0.20) respectively | 5,000 | 5,000 |
| packings hours | 20 | 1 |
| Presque Isle Blend | Mentor Headlands Blend | Total | |
| Purchase Orders | 4 | 6 | 10 |
| Setups | 150 | 15 | 165 |
| batches | 50 | 5 | 55 |
| Roasting Hours | 1,000 | 14.29 | 1,014.29 |
| Blending Hours | 500 | 10 | 510 |
| Packaging Hours | 20 | 1 | 21 |
| Activity | Cost Driver | Budgeted Cost | Divided by: Total activity | Cost driver rate |
| Purchasing | #Purchase Orders | 474,000 | 10 | 47,400.0000 |
| Material Handling | #Setups | 638,000 | 165 | 3,866.6667 |
| Quality Control | #batches | 67,500 | 55 | 1,227.2727 |
| Roasting | Roasting Hours | 920,000 | 1,014.29 | 907.0384 |
| Blending | Blending Hours | 190,000 | 510 | 372.5490 |
| Packaging | Packaging Hours | 103,000 | 21 | 4,904.7619 |
| Presque Isle Blend | Activity | Multiply: Cost driver rate | Allocated cost |
| Purchasing | 4 | 47,400.0000 | $ 189,600.00 |
| Material Handling | 150 | 3,866.6667 | $ 580,000.00 |
| Quality Control | 50 | 1,227.2727 | $ 61,363.64 |
| Roasting | 1,000 | 907.0384 | $ 907,038.42 |
| Blending | 500 | 372.5490 | $ 186,274.51 |
| Packaging | 20 | 4,904.7619 | $ 98,095.24 |
| Total allocated overhead cost to Presque Isle Blend | $ 2,022,371.81 | ||
| Divided by: units in pounds | 100,000 | ||
| Cost per unit for Presque Isle Blend | $ 20.22372 | ||
| Mentor Headlands Blend | Activity | Multiply: Cost driver rate | Allocated cost |
| Purchasing | 6 | 47,400.0000 | $ 284,400.00 |
| Material Handling | 15 | 3,866.6667 | $ 58,000.00 |
| Quality Control | 5 | 1,227.2727 | $ 6,136.36 |
| Roasting | 14.29 | 907.0384 | $ 12,961.58 |
| Blending | 10 | 372.5490 | $ 3,725.49 |
| Packaging | 1 | 4,904.7619 | $ 4,904.76 |
| Total allocated overhead cost to Mentor Headlands Blend | $ 370,128.19 | ||
| Divided by: units in pounds | 5,000 | ||
| Cost per unit for Mentor Headlands Blend | $ 74.02564 | ||
| Activity-based costing | Presque Isle Blend | Mentor Headlands Blend |
| Direct material | 4.25000 | 3.50000 |
| Direct labor cost | 0.95000 | 0.75000 |
| Allocated overhead (As above) | 20.22372 | 74.02564 |
| Cost per unit using Activity-based costing method | $ 25.42372 | $ 78.27564 |
Answer 3
| Traditional costing method | Presque Isle Blend | Mentor Headlands Blend | Total |
| Selling price per unit | $ 30.00000 | $ 24.00000 | |
| Less: Unit cost | $ 27.92875 | $ 22.19375 | |
| Gross profit per unit | $ 2.07125 | $ 1.80625 | |
| multiply: Number of units in pounds | 100,000 | 5,000 | |
| Gross profit under Traditional costing method | $ 207,125 | $ 9,031 | $ 216,156 |
| Activity-based costing | Presque Isle Blend | Mentor Headlands Blend | Total |
| Selling price per unit | $ 30.00000 | $ 24.00000 | |
| Less: Unit cost | $ 25.42372 | $ 78.27564 | |
| Gross profit per unit | $ 4.57628 | $ (54.27564) | |
| Multiply: Number of units in pounds | 100,000 | 5,000 | |
| Gross profit(loss) under Activity based costing method | $ 457,628 | $ (271,378) | $ 186,250 |
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