Question

Coffee Bean, Inc. (CBI), is a processor and distributor of a variety of blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. CBI offers a large variety of different coffees that it sells to gourmet shops in one-pound bags. The major cost of the coffee is raw materials. However, the company’s predominantly automated roasting, blending, and packing processes require a substantial amount of manufacturing overhead. The company uses relatively little direct labor. Some of CBI’s coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes.

 

For the coming year, CBI's budget includes estimated manufacturing overhead cost of $2,604,000. CBI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $504,000, which represents 42,000 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.

 

	Mona Loa		Malaysian
Direct materials	$	3.40	$	2.40
Direct labor (0.025 hours per bag)	$	0.30	$	0.30

 

CBI'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	1,630	orders	$	358,600
Material handling	Number of setups	1,720	setups		550,400
Quality control	Number of batches	520	batches		83,200
Roasting	Roasting hours	95,300	roasting hours		953,000
Blending	Blending hours	32,700	blending hours		392,400
Packaging	Packaging hours	26,640	packaging hours		266,400
Total manufacturing overhead cost				$	2,604,000

 

Data regarding the expected production of Mona Loa and Malaysian coffee are presented below. There will be no raw materials inventory for either of these coffees at the beginning of the year.

 

	Mona Loa		Malaysian
Expected sales	60,000	pounds	2,000	pounds
Batch size	12,000	pounds	500	pounds
Setups	3	per batch	3	per batch
Purchase order size	12,000	pounds	500	pounds
Roasting time per 100 pounds	1	roasting hours	1	roasting hours
Blending time per 100 pounds	0.5	blending hours	0.5	blending hours
Packaging time per 100 pounds	0.1	packaging hours	0.1	packaging hours

 

Required:

1. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, do the following:

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

b. Determine the unit product cost of one pound of the Mona Loa coffee and one pound of the Malaysian coffee.

2. Using activity-based costing as the basis for assigning manufacturing overhead cost to products, do the following:

a. Determine the total amount of manufacturing overhead cost assigned to the Mona Loa coffee and to the Malaysian coffee for the year.

b. Using the data developed in part (2a) above, compute the amount of manufacturing overhead cost per pound of the Mona Loa coffee and the Malaysian coffee.

c. Determine the unit product cost of one pound of the Mona Loa coffee and one pound of the Malaysian coffee.