Question

Falcon Specialty Coffee Company 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. Company currently has 12 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 labour. Some of the coffees are very popular and sell in large volumes(X) while a few of the newer blends have very low volumes(Y).company prices its coffee at full product cost, including allocated overhead. 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.

Falcon Specialty Coffee Company 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. Company currently has 12 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 labour. Some of the coffees are very popular and sell in large volumes(X) while a few of the newer blends have very low volumes(Y).company prices its coffee at full product cost, including allocated overhead. 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. Particulars Product X Product Y Total for all Products Units Produced Per Annum 50,000 1000 500,000 Material Cost Per Unit (Rs) 1 1 Direct Labour Per Unit 15 Minutes 15 Minutes Machine Time Per Unit 1hour 1hour Cost drivers: No Of Setup Per Annum 24 2 500 No Of Purchase Orders For Materials 36 6 2800 No Of Times Material Handled 200 15 12000 Direct Labor Cost Per Hour (Rs.) 5 Overhead Costs: Setup 280,000 Purchasing 145,000 Material Handling 130,000 Machines 660,000

Total machine hours are 600,000.

Required: Find out the per unit production cost of product X and product Y:

1. Using conventional product costing machine hour’s overhead absorption rate.
2. Using activity based costing.
3. Compare the result of two methods and comments.
4. Why is thought a traditional and volume-based costing systems tend to distort product cost?

Answer 1

Answe A
Statement Showing Per Unit Cost
	Absorption Costing
Particulars	Amount (Rs)	Amount (Rs)
	Per Unit	Per Unt
Material Cost	1	1
Direct Labor Cost (Hour x Rate per hour)	1.25	1.25
Overhead Cost (WN 1)	2.025	2.025
(Machine Hour x Machine Hour abs rate)
Total Cost Per Unit	4.275	4.275
WN 1
Machine Hour Absoption Rate	Total Overhead Cost
Machine Hour
	1215000	=2.025/Machine Hour
	600000
Total Overhead	(+280000+145000+130000+660000)
Answer B
Statement Total Cost per Unit under ABC
Particulars	Amount (Rs)	Amount (Rs)
	Per Unit	Per Unt
Material Cost	1	1
Direct Labor Cost (Hour x Rate per hour)	1.25	1.25
Overhead Cost (WN 2)	1.45	2.69
Total Cost Per Unit	3.7	4.94
WN2	Product X	Product Y
Units
Activity Rate X Per Activity cost
Setup Cost	0.27 =(24*560)/50000	1.12 =(560*2)/1000
Purchasing Cost	0.037= (51.79*36)/50000	0.31=(51.79*6)/1000
Material Handling	0.043= (200*10.83)/50000	0.16= (15*10.83)/1000
Machine	1.1	1.1
Per Unit Overhead	1.45	2.69
Cost Pool	Overhead Cost $	Cost Driver	Activity Level	Overhead Cost/Activity Level
Setup Cost	280000	NO of Set Up	500	560.00
Purchasing Cost	145000	No Of Purchase Orders For Materials	2800	51.79
Material Handling	130000	No Of Times Material Handled	12000	10.83
Machine	660000	Machine Hour	600000	1.10
Total Overhead Cost	1215000
Answer C
	Comapare under A & B
	Product X	Product Y
Cost Under MachineHour Absorption Rate	4.275	4.275
Cost Under Activity-based costing	3.7	4.94
Difference	0.575	-0.665
Under Absorption, product X cost is highly charged, however product Y is less charged
Answer D
Under traditional costing, we do not go product activity-based but all overhead is charged at one rate which is totally incorrect
That’s why absorption cost the best way to allocate overhead

Note: Positive rating will be highly appreciated. As I have solved all parts in one go.