Question

Activity-Based Costing

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

Answer 1