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 $3,100,000, which has been allocated on the basis of each product’s direct labor cost. The budgeted direct labor cost for the current year totals $601,000. The firm budgeted $6,100,000 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		1,168		$	580,000
Materials handling	Setups		1,810			721,000
Quality control	Batches		730			145,000
Roasting	Roasting hours		96,200			962,000
Blending	Blending hours		33,700			337,000
Packaging	Packaging hours		26,100			261,000
Total factory overhead cost					$	3,006,000

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	101,000 pounds	2,010 pounds
Batch size	10,100 pounds	510 pounds
Setups	3 per batch	3 per batch
Purchase order size	25,100 pounds	510 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 101,000 pounds of Mona Loa and the 2,010 pounds of Malaysian.

Answer 1

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Coffee Bean Inc.
Ans 1 a
Calculation of predetermined overhead rate	Amount $	Note
Budgeted factory overhead	3,006,000.00	A
Budgeted direct labor cost	601,000.00	B
Predetermined overhead rate	5.00	C=A/B

Ans 1 b- Workings	Mona Loa	Malaysian	Note
Direct labor cost	0.30	0.30	D
Predetermined overhead rate	5.00	5.00	See C
Overhead allocated	1.50	1.50	E=C*D
Ans 1 b
Unit Product cost	Mona Loa	Malaysian	Note
Direct Materials	4.20	3.20
Direct Labor	0.30	0.30	See D
Overhead allocated	1.50	1.50	See E
Cost per 1 pound bag	6.00	5.00	F
Markup at 30%	1.80	1.50	G=F*30%
Sell price of 1 pound bag	7.80	6.50	H=F+G
Ans 2- Workings	Mona Loa	Malaysian	Note
Expected Sales	101,000.00	2,010.00	I
Batch Size	10,100.00	510.00	J
Number of Batches	10.00	3.94	K=I/J
Setups per Batch	3.00	3.00	L
Number of Setups	30.00	11.82	M=K*L
Purchase Orders Size	25,100.00	510.00	N
Purchase Orders	4.02	3.94	O=I/N
Roasting time per 100 pound	1.00	1.00	P
Roasting Hours	1,010.00	20.10	Q=I/100*P
Blending time per 100 pound	0.50	0.50	R
Blending Hours	505.00	10.05	S=I/100*R
Packaging time per 100 pound	0.10	0.10	T
Packaging Hours	101.00	2.01	U=I/100*T

					See workings above.
Overhead allocation table		V	W	X=V/W	Y	Z=X*Y	AA=Z/107000	AB	AC=X*AB	AD=AC/2070
					Mona Loa			Malaysian
Activity	Cost Driver	Cost Pool	Cost Driver Volume	Cost per Cost Driver	Cost Driver used	Cost allocated	Cost Per unit	Cost Driver used	Cost allocated	Cost Per unit
Purchasing	Purchase Orders	580,000.00	1,168.00	496.58	4.02	1,998.17	0.02	3.94	1,957.09	0.95
Material Handling	Number of setups	721,000.00	1,810.00	398.34	30.00	11,950.28	0.11	11.82	4,709.81	2.28
Quality Control	Number of batches	145,000.00	730.00	198.63	10.00	1,986.30	0.02	3.94	782.84	0.38
Roasting*	Roasting Hours	962,000.00	96,200.00	10.00	1,010.00	10,100.00	0.09	20.10	201.00	0.10
Blending	Blending Hours	337,000.00	33,700.00	10.00	505.00	5,050.00	0.05	10.05	100.50	0.05
Packaging	Packaging Hours	261,000.00	26,100.00	10.00	101.00	1,010.00	0.01	2.01	20.10	0.01
Total Activity Cost		3,006,000.00				31,084.75	0.29		7,751.24	3.74
Expected Sales						101,000.00			2,010.00

Ans 2
Unit Product cost	Mona Loa		Malaysian
Direct unit costs	Amount $	Amount $	Amount $	Amount $
Direct Materials	4.20		3.20
Direct Labor	0.30	4.50	0.30	3.50
Indirect unit costs
Purchasing		0.02		0.95
Material Handling		0.11		2.28
Quality Control		0.02		0.38
Roasting		0.09		0.10
Blending		0.05		0.05
Packaging		0.01		0.01
Total Unit cost		4.80		7.25

Answer 2

Answer 3