Question

Coffee Bean Incorporated (CBI) processes and distributes high-quality coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently, the firm offers 2 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.

 

CBI prices its coffee at full product cost, including allocated overhead, plus a markup of 30%. If its prices 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 $3,000,000, which has been allocated on the basis of each product’s direct labor cost. The budgeted direct labor cost for the current year totals $600,000. The firm budgeted $6,000,000 for purchase and use of direct materials (mostly coffee beans).

 

The budgeted direct costs for 1-pound bags 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 Driver Consumption	Budgeted Cost
Purchasing	Purchase orders	1,158	$ 579,000
Materials handling	Setups	1,800	720,000
Quality control	Batches	720	144,000
Roasting	Roasting hours	96,100	961,000
Blending	Blending hours	33,600	336,000
Packaging	Packaging hours	26,000	260,000
Total factory overhead cost			$ 3,000,000

 

Data regarding the current year’s production for the Mona Loa and Malaysian lines follow. There is no beginning or ending direct materials inventory for either of these coffees.

 

	Mona Loa	Malaysian
Budgeted sales	100,000 pounds	2,000 pounds
Batch size	10,000 pounds	500 pounds
Setups	3 per batch	3 per batch
Purchase order size	25,000 pounds	500 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

 

Coffee Bean has total practical capacity as noted in the table below, i.e. processing 1,400 purchase orders, 2,400 setups, etc. These are the levels of activity work that are sustainable.

 

Activity	Practical Capacity
Purchasing	1,400
Materials handling	2,400
Quality control	1,200
Roasting	100,000
Blending	36,000
Packaging	30,000

 

Required:

1. Determine the activity rates based on practical capacity and the cost of idle capacity for each activity. (Round "Usage %" and "Practical Capactity Rate" to 2 decimal places. For percentages .1234 = 12.34%.)

Answer 1