Question

Problem 5-42 Volume-Based Costing versus ABC [LO 5-2, 5-3]

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 $ 3,000,000, which has been allocated on the basis of each product's direct labor cost. The budgeted direct labor cost for the current year totals $ 600,000 . The firm budgeted $ 6,000,000 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:

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

Answer 1