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 $3,600,000, which has been allocated on the basis of each product’s direct labor cost. The budgeted direct labor cost for the current year totals $606,000. The firm budgeted $6,600,000 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 1,218 $ 585,000 Materials handling Setups 1,860 726,000 Quality control Batches 780 150,000 Roasting Roasting hours 96,700 967,000 Blending Blending hours 34,200 342,000 Packaging Packaging hours 26,600 266,000 Total factory overhead cost $ 3,036,000 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 106,000 pounds 2,060 pounds Batch size 10,600 pounds 560 pounds Setups 3 per batch 3 per batch Purchase order size 25,600 pounds 560 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 106,000 pounds of Mona Loa and the 2,060 pounds of Malaysian.

Answer 1

Part 1
Determine the predetermined overhead rate that will be used during the year.
Predetermined overhead rate = Expected manufacturing overhead costs/Estimated direct labour
Predetermined overhead rate = $3,600,000/$606,000	$5.94
Determine the unit product cost of one pound of the Mona Loa coffee and one pound of the Malaysian coffee.
	Mona Loa	Malaysian
Direct materials (given)	$4.2	$3.2
Direct labor (given)	$0.3	$0.3
Manufacturing overhead	$5.94	$5.94
Total unit product cost	$10.44	$9.44