Question

Java Source, Inc., (JSI) buys coffee beans from around the world and roasts, blends, and packages them for resale. Some of JSI’s coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. JSI prices its coffees at manufacturing cost plus a markup of 25%.

For the coming year, JSI’s budget includes estimated manufacturing overhead cost of $2,200,000. JSI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $600,000, which represents 50,000 hours of direct labor time.

The expected costs for direct materials and direct labor for one-pound bags of two of the company’s coffee products appear below.

	Kenya Dark			Viet Select
Direct materials	$	4.50		$	2.90
Direct labor (0.02 hours per bag)	$	0.34		$	0.34

JSI’s controller believes that the company’s traditional costing system may be providing misleading cost information. To determine whether or not this is correct, the controller has prepared an analysis of the year’s expected manufacturing overhead costs, as shown in the following table:

Activity Cost Pool	Activity Measure	Expected Activity for the Year			Expected Cost for the Year
Purchasing	Purchase orders	2,000	orders		$	560,000
Material handling	Number of setups	1,000	setups			193,000
Quality control	Number of batches	500	batches			90,000
Roasting	Roasting hours	95,000	roasting hours			1,045,000
Blending	Blending hours	32,000	blending hours			192,000
Packaging	Packaging hours	24,000	packaging hours			120,000
Total manufacturing overhead cost					$	2,200,000

Data regarding the expected production of Kenya Dark and Viet Select coffee are presented below.

	Kenya Dark		Viet Select
Expected sales	80,000	pounds	4,000	pounds
Batch size	5,000	pounds	500	pounds
Setups	2	per batch	2	per batch
Purchase order size	20,000	pounds	500	pounds
Roasting time per 100 pounds	1.5	roasting hours	1.5	roasting hours
Blending time per 100 pounds	0.5	blending hours	0.5	blending hours
Packaging time per 100 pounds	0.3	packaging hours	0.3	packaging hours

Required:

1. Using direct labor-hours as the manufacturing overhead cost allocation base, do the following:

a. Determine the plantwide predetermined overhead rate that will be used during the year.

b. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee.

2. Using the activity-based absorption costing approach, do the following:

a. Determine the total amount of manufacturing overhead cost assigned to Kenya Dark coffee and to Viet Select coffee for the year.

b. Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of Kenya Dark coffee and Viet Select coffee.

c. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee.

Answer 1

1a.

Overhead rate shall be $2,200,000/50,000hrs = $44 per direct labor hour

1b.

		Kenya Dark	Viet Select
Direct material		4.5	2.9
Direct Labor		0.34	0.34
Overheads ($44X 0.02hrs)		0.88	0.88
Unit Product cost (Sum of above)		5.72	4.12