Question

Coffee Bean Inc. (CBI) processes and distributes a variety of coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently, the firm offers 15 coffees to gourmet shops in 1-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred 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; a few of the newer brands have very low volumes. CBI prices its coffee at full product cost, including allocated overhead, plus a markup of 30%. If its prices for certain coffees are significantly higher than the market, CBI lowers its prices. The company competes primarily on the quality of its products, but customers are price conscious as well.

Data for the current budget include factory overhead of $2,300,000, which has been allocated on the basis of each product’s direct labor cost. The budgeted direct labor cost for the current year totals $593,000. The firm budgeted $5,300,000 for purchase and use of direct materials (mostly coffee beans).

The budgeted direct costs for 1-pound bags of two of the company’s many products are as follows:

	Mona Loa			Malaysian
Direct materials	$	4.20		$	3.20
Direct labor		0.30			0.30

CBI’s controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the current year’s budgeted factory overhead costs:

Activity	Cost Driver	Budgeted Activity			Budgeted Cost
Purchasing	Purchase orders		1,088		$	572,000
Materials handling	Setups		1,730			713,000
Quality control	Batches		650			137,000
Roasting	Roasting hours		95,400			954,000
Blending	Blending hours		32,900			329,000
Packaging	Packaging hours		25,300			253,000
Total factory overhead cost					$	2,958,000

Data regarding the current year’s production of just two of its lines, Mona Loa and Malaysian, follow. There is no beginning or ending direct materials inventory for either of these coffees.

	Mona Loa	Malaysian
Budgeted sales	100,700 pounds	1,930 pounds
Batch size	9,300 pounds	430 pounds
Setups	3 per batch	3 per batch
Purchase order size	24,300 pounds	430 pounds
Roasting time	1 hour per 100 pounds	1 hour per 100 pounds
Blending time	0.5 hour per 100 pounds	0.5 hour per 100 pounds
Packaging time	0.1 hour per 100 pounds	0.1 hour per 100 pounds

Required:

1. Using Coffee Bean Inc.’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 Mona Loa coffee and one pound of Malaysian coffee.

2. Using an activity-based costing approach, develop a new product cost for 1 pound of Mona Loa coffee and 1 pound of Malaysian coffee. Allocate all overhead costs to the 100,700 pounds of Mona Loa and the 1,930 pounds of Malaysian.

Answer 1

1.

a. Predetermined overhead rate = Total budgeted overhead cost/ Budgeted direct labor cost

= $2300000/ $593000

= $3.88 per dollar of Direct labor cost incurred

b.

	Mona Loa	Malaysian
Direct material	$4.20	$3.20
Direct labor	0.30	0.30
Overheads:
Mona Loa (0.30 x 3.88)	1.16
Malaysian (0.30 x 3.88)		1.16
Total cost per pound	$5.66	$4.66
Add: Markup 30%	1.70	1.40
Selling price per pound	$7.36	$6.06

2.

Statement of allocation of overheads

	Mona Loa	Malaysian
Purchasing	572000/1088 x 4 = 2103	572000/1088 x 5 = 2629
Materials handling	713000/1730 x 33 = 13601	713000/1730 x 15 = 6182
Quality control	137000/650 x 11 = 2318	137000/650 x 5 = 1054
Roasting	954000/95400 x 1007 = 10070	954000/95400 x 19 = 190
Blending	329000/32900 x 504 = 5040	329000/32900 x 10 = 100
Packaging	253000/ 25300 x 101 = 1010	253000/25300 x 2 = 20
Total overhead allocation	$34142	$10175
No. of pounds	100700	1930
Overhead per pound	$0.34	$5.27

Statement of product cost

	Mona Loa	Malaysia
Direct materials	$4.20	$3.20
Direct labor	0.30	0.30
Overheads	0.34	5.27
Total cost per pound	$4.84	$8.77

Working notes:

	Mona Loa	Malaysian
Budgeted sales	100700 pounds	1930 pounds
Purchase order size	24300 pounds	430 pounds
No. of purchase orders	100700/ 24300 = 4	1930/ 430 = 5
Batch size	9300 pounds	430 pounds
No. of batches	100700/ 9300 = 11	1930/ 430 = 5
No. of set ups	11 x 3 = 33	5 x 3 = 15
Roasting hours	1/100 x 100700 = 1007	1/100 x 1930 = 19
Blending hours	0.5/100 x 100700 = 504	0.5/100 x 1930 = 10
Packaging hours	0.1/100 x 100700 = 101	0.1/100 x 1930 = 2

(Note: All figures in the working note section have been rounded off to 0 decimal places for simplicity).