Question

World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantly automated roasting and packing process. The company uses relatively little direct labor. Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 20 percent. If prices for certain coffees are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price-conscious as well. Data for the 20x1 budget include manufacturing overhead of $12,532,320, which has been allocated on the basis of each product’s direct-labor cost. The budgeted direct-labor cost for 20x1 totals $1,253,232. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $5,900,000. The expected prime costs for one-pound bags of two of the company’s products are as follows: Kona Malaysian Direct material $ 3.00 $ 4.00 Direct labor 0.50 0.50 WGCC’s controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20x1 budgeted manufacturing-overhead costs shown in the following chart. Activity Cost Driver Budgeted Activity Budgeted Cost Purchasing Purchase orders 2,341 $ 2,387,820 Material handling Setups 3,640 2,966,600 Quality control Batches 1,460 598,600 Roasting Roasting hours 193,200 4,057,200 Blending Blending hours 67,600 1,419,600 Packaging Packaging hours 52,500 1,102,500 Total manufacturing-overhead cost $ 12,532,320 Data regarding the 20x1 production of Kona and Malaysian coffee are shown in the following table. There will be no raw-material inventory for either of these coffees at the beginning of the year. Kona Malaysian Budgeted sales 2,200 lb. 101,000 lb. Batch size 550 lb. 20,200 lb. Setups 3 per batch 3 per batch Purchase order size 550 lb. 50,500 lb. Roasting time 1 hr. per 100 lb. 1 hr. per 100 lb. Blending time 0.5 hr. per 100 lb. 0.5 hr. per 100 lb. Packaging time 0.1 hr. per 100 lb. 0.1 hr. per 100 lb.
Required: 1. Using WGCC’s current product-costing system:

a. Determine the company’s predetermined overhead rate using direct-labor cost as the single cost driver.

b. Determine the full product costs and selling prices of one pound of Kona coffee and one pound of Malaysian coffee.

2. Develop a new product cost, using an activity-based costing approach, for one pound of Kona coffee and one pound of Malaysian coffee.

Answer 1

The solution to this answer will be done in two parts in requirement 1 a we will find the company's predetermined overhead rate which will come $10 then in 1 b we will find full product cost of the the world gourmet coffee company for Kona which will come 10.2 and Malaysian which will come 11.4 .

  In requirement 2 firstly we will determine the unit cost of each of the activity by using (cost / activity )then we will prepare separate standard cost per pound for Kona and Malaysian coffee which will come 10.866 for kona coffee and 5.027 for Malaysian coffee.

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