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 $2,800,000, which has been allocated on the basis of each product’s direct labor cost. The budgeted direct labor cost for the current year totals $598,000. The firm budgeted $5,800,000 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		1,138		$	577,000
Materials handling	Setups		1,780			718,000
Quality control	Batches		700			142,000
Roasting	Roasting hours		95,900			959,000
Blending	Blending hours		33,400			334,000
Packaging	Packaging hours		25,800			258,000
Total factory overhead cost					$	2,988,000

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	100,200 pounds	1,980 pounds
Batch size	9,800 pounds	480 pounds
Setups	3 per batch	3 per batch
Purchase order size	24,800 pounds	480 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 100,200 pounds of Mona Loa and the 1,980 pounds of Malaysian.

Answer 1

Kindly round off all answers as required since there are no instructions provided with the question regarding rounding off.

1a. Predetermined overhead rate = Budgeted manufacturing overhead/Budgeted direct labor cost = $2800000/$598000 = $4.68 per direct-labor dollar

b.

	Mona Loa		Malaysian
Full product cost per pound	$                     5.90	per pound	$                 4.90	per pound
Selling price per pound	$                     7.68	per pound	$                 6.38	per pound

Working:

	Mona Loa	Malaysian
Direct material	4.20	3.20
Direct labor	0.30	0.30
Manufacturing overheads	1.40	1.40
Full product cost per pound $	5.90	4.90
Mark-up 30%	1.77	1.47
Selling price per pound $	7.68	6.38

2.

	New Product Cost
Mona Loa coffee	$                     4.82	per pound
Malaysian coffee	$                     7.66	per pound

Working:

Activity	Budgeted Cost $	Budgeted Activity	Activity Rate $	Mona Loa		Malaysian
				Activity Usage	Allocated Cost $	Activity Usage	Allocated Cost $
Purchasing	577000	1138	507	4	2049	4.125	2091
Material handling	718000	1780	403	31	12373	12.375	4992
Quality control	142000	700	203	10	2074	4.125	837
Roasting	959000	95900	10	1002	10020	19.8	198
Blending	334000	33400	10	501	5010	9.9	99
Packaging	258000	25800	10	100	1002	1.98	20
Total manufacturing overhead	2988000				32527		8237
Number of pounds					100200		1980
Manufacturing overhead per pound					0.32		4.16

	Mona Loa	Malaysian
Direct material	4.20	3.20
Direct labor	0.30	0.30
Manufacturing overhead	0.32	4.16
Total cost per pound $	4.82	7.66