Question

In: Accounting

Part 1 of the assignment requires you to determine the cost of a unit of coffee...

Part 1 of the assignment requires you to determine the cost of a unit of coffee (Mona Loa and Malaysian) using the traditional overhead allocation method. A unit of coffee is a one pound bag. The unit cost will include direct materials, direct labor, and manufacturing overhead (as determined using the predetermined overhead rate). You NEED to use Excel formulas whenever possible. Basically, the only time you will not use formulas is when you enter given information.

Part 2 of the assignment requires you to determine the cost of a unit of coffee (Mona Loa and Malaysian) using the activity-based costing method. As with the traditional method, you will need to show direct materials, direct labor and manufacturing overhead (as determined using ABC). Once again, use formulas wherever you can.

Part 2A is a comparison of both methods. Link the numbers to Parts 1 and 2 whenever possible. Show a side-by-side comparison of unit product costs calculated under each method (show the unit product cost of each type of coffee using both traditional and ABC costing). Unit product costs include direct materials, direct labor and manufacturing overhead costs on a per unit basis. Further, determine the changes in the profit margins for each bag of coffee under both methods (the sales price mark up % is given below). How much was the company losing per bag of the Malaysian coffee under the Traditional Method? Remember to use formulas.

Part 3 requires you to write a memo on your findings. The memo should be addressed to the president of Coffee Bean, Inc. The tone and format of the memo should be professional. Make recommendations based on your findings. Point out what caused differences between the two methods. Also, point out any potential problems you see with your recommendations (hint: see the part of the chapter on the limitations of ABC). The memo should be less than 300 words. Presidents don’t like to read long memos!

Activity-Based Costing as an Alternative to Traditional Product Costing

Coffee Bean, Inc. (CBI), is a processor and distributor of a variety of blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. CBI currently has 40 different coffees that it sells to gourmet shops in one-pound bags. The major cost of the coffee is raw materials. However, the company's predominantly automated roasting, blending, and packing process requires a substantial amount of manufacturing overhead. The company uses relatively little direct labor.

      Some of CBI’s coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. CBI prices its coffee at manufacturing cost plus a markup of 30%. If CBI's prices for certain coffees are significantly higher than market, adjustments are made to bring CBI's prices more into alignment with the market because customers are somewhat price conscious.

      For the coming year, CBI's budget includes estimated manufacturing overhead cost of $4,500,000. CBI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $600,000, which represents 80,000 hours of direct labor time. Based on the sales budget and expected raw materials costs, the company will purchase and use $6,000,000 of raw materials (mostly coffee beans) during the year.

      The expected costs for direct materials and direct labor for one-pound bags of two of the company's coffee products appear below.

Mona Loa

Malaysian

  Direct materials

$

4.20       

$

3.20       

  Direct labor (0.05 hours per bag)

$

0.30       

$

0.30       

(note that it takes 0.05 DLHs to make one bag of coffee – you’ll need this to apply MOH using the Traditional Method)

      CBI's controller believes that the company's traditional costing system may be providing misleading cost information. To determine whether or not this is correct, the controller has prepared an analysis of the year’s expected manufacturing overhead costs, as shown in the following table:

  Activity Cost Pool

Activity Measure

Estimated Activity
for the Year

Estimated
Cost for the
Year

  Purchasing

  Purchase orders

3,000

orders

$ 600,000   

  Material handling

  Number of setups

2,500

setups

$ 1,120,000   

  Quality control

  Number of batches

1,000

batches

$ 160,000   

  Roasting

  Roasting hours

120,000

roasting hours

$1,200,000   

  Blending

  Blending hours

80,000

blending hours

$ 1,000,000   

  Packaging

  Packaging hours

21,000

packaging hours

$ 420,000   

  Total manufacturing overhead cost

$ 4,500,000   

Data regarding the expected production of Mona Loa and Malaysian coffee are presented below.

Mona Loa

Malaysian

  Expected sales

70,000

pounds

1,500

pounds

Data regarding the expected activities used by Mona Loa and Malaysian coffees are presented below.

Mona Loa

Malaysian

  Purchase Orders

5

orders

4

orders

  Setups

30

setups

12

setups

  Batches

10

batches

4

batches

  Roasting time

700

hours

15

hours

  Blending time

350

hours

7.5

hours

  Packaging time

70

hours

1.5

hours

Solutions

Expert Solution

a. Predetermined overhead rate = Budgeted manufacturing overhead/Budgeted direct labor cost = $ 45,00,000/$ 600,000 = $ 7.5 per direct-labor dollar

b.

Mona Loa Malaysian
Full product cost per pound $ 6.75 per pound $ 5.75 per pound
Selling price per pound $ 8.775 per pound $ 7.475 per pound

Working:

Mona Loa Malaysian
Direct material 4.20 3.20
Direct labor 0.30 0.30
Manufacturing overheads (0.3X7.5) 2.25 2.25
Full product cost per pound $ 6.75 5.75
Mark-up 30% 2.025 1.725
Selling price per pound $ 8.775 7.475

C

New Product Cost
Mona Loa coffee $                     4.74 per pound
Malaysian coffee $ 8.23 per pound

Working:

Activity Budgeted Cost $ Budgeted Activity Activity Rate $ Mona Loa Malaysian
Activity Usage Allocated Cost $ Activity Usage Allocated Cost $
Purchasing 600000 3000 200 5 1000 4 800
Material handling 11,20,000 2500 448 30 13440 12 5376
Quality control 160000 1000 160 10 1600 4 640
Roasting 12,00,000 120000 10 700 7000 15 150
Blending 1,000,000 80000 12.5 350 4375 7.5 93.75
Packaging 420000 21000 20 70 1400 1.5 30
Total manufacturing overhead 45,00,000 16715 7089.75
Number of pounds 70000 1500
Manufacturing overhead per pound 0.24 4.73
Mona Loa Malaysian
Direct material 4.20 3.20
Direct labor 0.30 0.30
Manufacturing overhead 0.24 4.73
Total cost per pound $ 4.74 8.23

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