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

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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
	Mona Loa	Malaysian
Budgeted sales P	100700	1930
Batch size P	9300	430
Setups	3 per batch	3 per batch
Purchase order size	24300	430
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
a.. Predetermined Overhead Rate
Factory Overhead/Direct Labor Cost	2300000/593000	3.88
b. Full Product Cost
Product Cost	Mona Loa	Malaysian
Direct Materials	4.2	3.2
Direct Labor	0.3	0.3
Overheads	1.16	1.16
(predetermined overhead rate*Direct Labor)
Total Product Cost	5.66	4.66
Mark up 30%	1.70	1.40
Selling Price	7.36	6.06
c. Activity Based Costing
	A	B	A/B
Activity	Budgeted Activity	Budgeted Cost	Cost per Unit
Purchasing	1088	572000	525.74
Materials handling	1730	713000	412.14
Quality control	650	137000	210.77
Roasting	95400	954000	10.00
Blending	32900	329000	10.00
Packaging	25300	253000	10.00
Cost Driver	Mona Loa	Malaysian
Purchasing	4.14	4.49	Budgeted Sale/Purchase order Size
Materials handling	32.48	13.47	Budgeted Sale/Batch Size*Setups
Quality control	10.83	4.49	Budgeted Sale/Batch Size
Roasting	1007	19.3	Budgeted Sale/100
Blending	503.5	9.65	Budgeted Sale/100*0.5
Packaging	100.7	1.93	Budgeted Sale/100*0.1
Product Cost:
Product Cost	Mona Loa	Malaysian
Direct Materials	4.2	3.2
Direct Labor	0.3	0.3
Overheads:
Purchasing	0.02	1.22	Cost per unit/budgeted sale*Pur Size
Materials handling	0.13	2.88	Cost per unit/budgeted sale*No of Setups
Quality control	0.02	0.49	Cost per unit/budgeted sale*Batches
Roasting	0.10	0.10	Cost per unit/budgeted sale*Roasting Hour
Blending	0.05	0.05	Cost per unit/budgeted sale*Blending Hour
Packaging	0.01	0.01	Cost per unit/budgeted sale*Packaging Time
Total Cost per Pound	4.84	8.25