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 30 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 $13,616,160, which has been allocated on the basis of each product’s direct-labor cost. The budgeted direct-labor cost for 20x1 totals $1,361,616. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $6,100,000.

The expected prime costs for one-pound bags of two of the company’s products are as follows:

	Kona			Malaysian
Direct material	$	3.20		$	4.20
Direct labor		0.70			0.70

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		2,391			$	2,534,460
Material handling	Setups		3,720				3,143,400
Quality control	Batches		1,500				645,000
Roasting	Roasting hours		195,200				4,489,600
Blending	Blending hours		68,400				1,573,200
Packaging	Packaging hours		53,500				1,230,500
Total manufacturing-overhead cost						$	13,616,160

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	2,600	lb.	103,000	lb.
Batch size	650	lb.	20,600	lb.
Setups	3	per batch	3	per batch
Purchase order size	650	lb.	51,500	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

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World Gourmet Coffee Company (WGCC)
Ans 1 a
Calculation of predetermined overhead rate	Amount $	Note
Budgeted factory overhead	13,616,160.00	A
Budgeted direct labor cost	1,361,616.00	B
Predetermined overhead rate	1000%	C=A/B

Ans 1 b- Workings	Kona	Malaysian	Note
Direct labor cost	0.70	0.70	D
Predetermined overhead rate	1000%	1000%	See C
Overhead allocated	7.00	7.00	E=C*D
Ans 1 b
Unit Product cost	Kona	Malaysian	Note
Direct Materials	3.20	4.20
Direct Labor	0.70	0.70	See D
Overhead allocated	7.00	7.00	See E
Cost per 1 pound bag	10.90	11.90	F
Markup at 30%	3.27	3.57	G=F*30%
Sell price of 1 pound bag	14.17	15.47	H=F+G
Ans 2- Workings	Kona	Malaysian	Note
Expected Sales	2,600.00	103,000.00	I
Batch Size	650.00	20,600.00	J
Number of Batches	4.00	5.00	K=I/J
Setups per Batch	3.00	3.00	L
Number of Setups	12.00	15.00	M=K*L
Purchase Orders Size	650.00	51,500.00	N
Purchase Orders	4.00	2.00	O=I/N
Roasting time per 100 pound	1.00	1.00	P
Roasting Hours	26.00	1,030.00	Q=I/100*P
Blending time per 100 pound	0.50	0.50	R
Blending Hours	13.00	515.00	S=I/100*R
Packaging time per 100 pound	0.10	0.10	T
Packaging Hours	2.60	103.00	U=I/100*T

See workings above		V	W	X=V/W	Y	Z=X*Y	AA=Z/2600	AB	AC=X*AB	AD=AC/103000
Overhead allocation table					Kona			Malaysian
Activity	Cost Driver	Cost Pool	Cost Driver Volume	Cost per Cost Driver	Cost Driver used	Cost allocated	Cost Per unit	Cost Driver used	Cost allocated	Cost Per unit
Purchasing	Purchase Orders	2,534,460.00	2,391.00	1,060.00	4.00	4,240.00	1.63	2.00	2,120.00	0.02
Material Handling	Number of setups	3,143,400.00	3,720.00	845.00	12.00	10,140.00	3.90	15.00	12,675.00	0.12
Quality Control	Number of batches	645,000.00	1,500.00	430.00	4.00	1,720.00	0.66	5.00	2,150.00	0.02
Roasting*	Roasting Hours	4,489,600.00	195,200.00	23.00	26.00	598.00	0.23	1,030.00	23,690.00	0.23
Blending	Blending Hours	1,573,200.00	68,400.00	23.00	13.00	299.00	0.12	515.00	11,845.00	0.12
Packaging	Packaging Hours	1,230,500.00	53,500.00	23.00	2.60	&nb ekkarill92 Next > < Previous Related Solutions World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The... 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... World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The... World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. 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