Question

Java Source, Inc. (JSI), 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. JSI offers a large variety of 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 processes require a substantial amount of manufacturing overhead. The company uses relatively little direct labor.

Some of JSI’s coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. JSI prices its coffees at manufacturing cost plus a markup of 25%, with some adjustments made to keep the company’s prices competitive.

For the coming year, JSI’s budget includes estimated manufacturing overhead cost of $2,864,700. JSI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $564,000, which represents 47,000 hours of direct labor time. Based on the sales budget and expected raw materials costs, the company will purchase and use $5,000,000 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 belo

2. Using activity-based absorption costing as the basis for assigning manufacturing overhead cost to products, do the following: a. Determine the total amount of manufacturing overhead cost assigned to the Kenya Dark coffee and to the Viet Select coffee for the year. b. Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of the Kenya Dark coffee and the Viet Select coffee. (Round your answers to 2 decimal places.)

	c. Determine the unit product cost of one pound of the Kenya Dark coffee and one pound of the Viet Select coffee. (Round intermediate calculations and final answers to 2 decimal places.)

Kenya Dark Viet Select   Direct materials 4.50   3.50        Direct labor (.035 hours per bag) 0.42 0.42      Expected Activity for the year Expected cost for the year   Purchasing   Purchase orders 1,750 orders 525,000      Material handling   Number of setups 1,790 setups 698,100      Quality control   Number of batches 560 batches 140,000      Roasting   Roasting hours 96,200 roasting hours 962,000      Blending   Blending hours 33,400 blending hours 334,000      Packaging   Packaging hours 25,700 packaging hours 205,600      Total manufacturing overhead cost 2,864,700   Kenya Dark Viet Select   Expected sales 103,000 pounds 3,000 pounds   Batch size 10,300 pounds 600 pounds   Setups 3 per batch 3 per batch   Purchase order size 20,600 pounds 600 pounds   Roasting time per 100 pounds 1.5 roasting hours 1.5 roasting hours   Blending time per 100 pounds 0.5 blending hours 0.5 blending hours   Packaging time per 100 pounds 0.3 packaging hours 0.3 packaging hours

Answer 1

The question can be easily answered as follows. The two workings computed below will help us easily solve this question in quick time. In workings 2, we have mentioned by the side of the coputed figures as to they are calculated/relevant for which type of overhead cost.

	Working 1: Calculation of ABC rate
	Overhead Cost	Driver	Units	Amount	Rate
	Purchasing	Purchase orders	1,750	5,25,000	300
	Material handling	Number of setups	1,790	6,98,100	390
	Quality control	Number of batches	560	1,40,000	250
	Roasting	Roasting hours	96,200	9,62,000	10
	Blending	Blending hours	33,400	3,34,000	10
	Packaging	Packaging hours	25,700	2,05,600	8
				28,64,700
	Working 2: Workings required for computation of total overhead costs
	Kenya Dark		Viet Select			Type of overhead
	Expected sales	1,03,000	pounds	3,000	pounds
	Batch size	10,300	pounds	600	pounds
	No of Batch (Expected Sales/Batch Size)	10		5		Quality Control
	Setups	3	per batch	3	per batch
	Total Setups (Batch size x Set ups per batch)	30		15		Material handling
	Purchase order size	20,600	pounds	600	pounds
	Number of orders (Expected Sales/Purchase order size)	5		5		Purchasing
	Roasting time per 100 pounds	1.5	roasting hours	1.5	roasting hours
	Blending time per 100 pounds	0.5	blending hours	0.5	blending hours
	Packaging time per 100 pounds	0.3	packaging hours	0.3	packaging hours
	Roasting hours required (Expected Sales/Roasting time per pound)	1545		45		Roasting
	Blending hours required (Expected Sales/Blending time per pound)	515		15		Blending
	Packaging hours required (Expected Sales/Packaging time per pound)	309		9		Packaging
	Answer to Question 2a.			Kenya Dark	Kenya Dark	Viet Select	Viet Select
	Comoutation of total amount of manufacturing overhead cost			Units	Amount	Units	Amount
	Purchasing Cost	Purchase orders	300/order	5	1500	5	1500
	Material handling Cost	Number of setups	390/setup	30	11700	15	5850
	Quality Control cost	Number of batches	250/batch	10	2500	5	1250
	Roasting Cost	Roasting hours	10/hour	1545	15450	45	450
	Blending cost	Blending hours	10/hour	515	5150	15	150
	Packaging cost	Packaging hours	8/hour	309	2472	9	72
	Total Overhead Cost				38772		9272
	Answer to Question 2b.				Kenya Dark		Viet Select
	Number of pounds manufactured	Pounds			103000		3000
	Total overhead Cost	$			38772		9272
	Manufacturing overhead cost per pound (Total overhead/No of pounds)				0.38		3.09
	Answer to Question 2c.
					Kenya Dark		Viet Select
	Raw material cost/pound				4.5		3.5
	Direct Labour cost/pound				0.42		0.42
	Prime Cost/pound				4.92		3.92
	Manufacturing overhead/pound				0.38		3.09
	Unit Production cost/pound				5.30		7.01