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 $5,300,000 for purchase and use of direct materials (mostly coffee beans).
The budgeted direct costs for 1-pound bags of two of the company’s many products are as follows:
CBI’s controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the current year’s budgeted factory overhead costs:
|Activity||Cost Driver||Budgeted Activity||Budgeted Cost|
|Total factory overhead cost||$||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.
|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|
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.
a. Predetermined overhead rate = Total budgeted overhead cost/ Budgeted direct labor cost
= $2300000/ $593000
= $3.88 per dollar of Direct labor cost incurred
|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|
Statement of allocation of overheads
|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
|Total cost per pound||$4.84||$8.77|
|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).