Question

ICP 3 From the Ground Up Inc. (FGU) is a distributor and processor of a variety of different brands of coffee. The company buys coffee beans from around the world and roasts, blends and packages them for resale. FGU currently has 15 different coffees that it offers to gourmet shops and restaurants in one-kilogram bags. The major cost is direct materials; however, there is a substantial amount of factory overhead in the predominantly automated roasting and packing process. The company uses relatively little direct labour. Some of the coffees are very popular and sell in large volumes, while a few of the newer brands have very low volumes. FGU prices its coffee at full product cost, including allocated overhead, plus a markup of 25%. If prices for certain coffees are significantly higher than the market, the prices are lowered. The company competes primarily on the quality of its products, but customers, especially restaurants, are price conscious as well. Data for the 20X9 budget includes factory overhead of $5,000,000, which has been allocated in the company's current costing system on the basis of each product's direct labour cost. The budgeted direct labour cost for 20X9 is $500,000. Budgeted purchases and use of direct materials (mostly coffee beans) will total $5,000,000. Budgeted direct costs for one-kilogram bags of two of the company's products (Colombian Roast, a popular, high-volume product, and Peruvian Blend, a more specialized, low-volume coffee) are as follows: Colombian Peruvian Roast Blend Direct materials $2.28 $2.84 Direct labour $0.20 $0.20 FGU's controller believes the current traditional product costing system may be providing misleading cost information. He has developed the following analysis of the 20X9 budgeted factory overhead costs: Budgeted Budgeted Activity Cost driver activity cost Purchasing Purchase order (PO) 3,187 $ 637,400 Materials handling Machine movements 1,500 675,000 Quality control Batches 500 170,000 Grinding Grinding hours 50,000 850,000 Roasting Roasting hours 110,000 1,100,000 Blending Blending hours 18,920 567,600 Packaging Packaging hours 40,000 1.000.000 $ 5.000.000 Data regarding the 20X9 production of Colombian Roast and Peruvian Blend coffee follow. There are no beginning or ending direct materials inventory for either of these coffees.

Answer 1

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From the Ground Up, Inc.
Answer a i.
Allocation of costs on the basis of direct labor cost:		Note
Particulars	Amount $
Total overhead cost	5,000,000.00	A
Budgeted Direct Labor cost	500,000.00	B
Predetermined Overhead rate	10.00	C=A/B
Answer a ii.
Particulars	Colombian	Peruvian	Note
Budgeted sales (kg)	200,000.00	2,500.00	D
Direct labor cost per kg	0.20	0.20	E
Direct labor cost	40,000.00	500.00	F=D*E
Predetermined Overhead rate	10.00	10.00	See C
Overhead cost allocated	400,000.00	5,000.00	G=F*C
Overhead cost per kg	2.00	2.00	H=G/D
Add: Direct Materials	2.28	2.84	I
Add: Direct Labor	0.20	0.20	J
Product cost	4.48	5.04	K=H+I+J
Mark up	1.12	1.26	L=K*25%
Sell Price per kg	5.60	6.30	M=K+L

Answer b
Calculation of activity based overhead rates		N	O	P=N/O
Activity	Cost Driver	Overhead costs	Cost Drivers used	ABC Rates
Purchasing	Purchase orders	637,400.00	3,187.00	200.00
Material Handling	Machine movements	675,000.00	1,500.00	450.00
Quality Control	Batches	170,000.00	500.00	340.00
Grinding	Grinding Hours	850,000.00	50,000.00	17.00
Roasting	Roasting Hours	1,100,000.00	110,000.00	10.00
Blending	Blending Hours	567,600.00	18,920.00	30.00
Packaging	Packaging Hours	1,000,000.00	40,000.00	25.00
	Total Activity Cost	5,000,000.00
Calculation of cost drivers used-
	Columbian	Peruvian	Note
Expected Sales	200,000.00	2,500.00	See D
Batch Size	10,000.00	500.00	Q
Number of batches	20.00	5.00	R=D/Q
Machine movements per batch	3.00	3.00	S
Number of Machine movements	60.00	15.00	T=R*S
Purchase order Size	5,000.00	250.00	U
Purchase orders	40.00	10.00	V=D/U
Grinding time per 100 kg	2.00	2.50	W
Grinding Hours	4,000.00	62.50	X=D/100*W
Roasting time per 100 kg	1.00	1.00	Y
Roasting Hours	2,000.00	25.00	Z=D/100*X
Blending time per 100 kg	0.50	0.50	AA
Blending Hours	1,000.00	12.50	AB=D/100*AA
Packaging time per 100 kg	0.10	0.10	AC
Packaging Hours	200.00	2.50	AD=D/100*AC

		See P	AE	AF=AE*P	AG	AH=AG*P
Allocation table			Columbian		Peruvian
Activity	Cost Driver	ABC Rates	Cost Drivers used	Cost assigned	Cost Drivers used	Cost assigned
Purchasing	Purchase orders	200.00	40.00	8,000.00	10.00	2,000.00
Material Handling	Machine movements	450.00	60.00	27,000.00	15.00	6,750.00
Quality Control	Number of batches	340.00	20.00	6,800.00	5.00	1,700.00
Grinding	Grinding Hours	17.00	4,000.00	68,000.00	62.50	1,062.50
Roasting	Roasting Hours	10.00	2,000.00	20,000.00	25.00	250.00
Blending	Blending Hours	30.00	1,000.00	30,000.00	12.50	375.00
Packaging	Packaging Hours	25.00	200.00	5,000.00	2.50	62.50
Total Cost assigned				164,800.00		12,200.00	AI
Expected Sales				200,000.00		2,500.00	See D
ABC cost per kg				0.82		4.88	AJ=AI/D
Direct Materials				2.28		2.84	See I
Direct Labor				0.20		0.20	See J
Total Cost per kg				3.30		7.92	AK=AJ+I+J
Markup at 25%				0.83		1.98	AL=AK*25%
Sell price per kg				4.13		9.90	AM=AK+AL