Question

World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead 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, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If prices for certain coffees are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price conscious as well.

Data for the 20 × 1 budget include manufacturing overhead of $ 20,656,800, which has been allocated on the basis of each product's direct labor cost. The budgeted direct-labor cost for 20 × 1 totals $ 2,065,680. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $ 7,300,000.

The expected prime costs for one-pound bags of two of the company's products are as follows:

WGCC's controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20 × 1 budgeted manufacturing-overhead costs shown in the following chart.

Data regarding the 20 × 1 production of Kona and Malaysian coffee are shown in the following table. There will be no raw-material inventory for either of these coffees at the beginning of the year.

Required:

1. Using WGCC'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 Kona coffee and one pound of Malaysian coffee.

2. Develop a new product cost, using an activity-based costing approach, for one pound of Kona coffee and one pound of Malaysian coffee.

Answer 1

World Gourmet Coffee Company Requirement 1a. Predetermined Overhead rate = 20656800 / 2065680 = $10 Requirement 1b. Direct material Direct labor Overhead (0.70 x $10) Full product cost 30% markup Selling price Kona Malaysian 2.8 3.8 0.7 0.7 7 10.5 11.5 3.15 3.45 13.65 14.95

Requirement 2. First, determine the unit cost for each of the activities (Cost + Activity): Budgeted Budgeted Unit Activity Cost driver Activity Cost Cost Purchasing Purchase orders 26913498300 1300 Material handling Setups 4200 4305000 1025 Quality control Batches 1740 957000 550 Roasting Roasting hours 207200 7252000 Blending Blending hours 73200 2562000 35 Packaging Packaging hours 59500 2082500 35 Standard Cost per pound: Kona Coffee (5,000 lbs) Direct material Direct labor Purchasing (5,000 + 1,250 = 4 orders x $1300 = $5,200 + 5,000) Material handling (3x4 batches=12 setups $1025 = $12,30045,000) Quality control (4 batches x $550 = $2200 +5,000) Roasting (50 hrs x $35 = $1750 + 5,000) Blending (25 hrs x $35 = $875 +5,000) Packaging (Shrs x $35 = $175 +5,000) Total cost 2.8 0.7 1.04 2.46 0.44 0.35 0.175 0.035 Standard Cost per pound: Malaysian Coffee (115,000 lbs) Direct material Direct labor Purchasing (115,000 = 23,000 =5 orders x $1300 = $6,500 - 115,000) Material handling (3x5 batches=15 setups $1025 = $15,375+115,000 Quality control (5batches x $550 = $2750 + 115,000) Roasting (1150 hrs x $35 = $40250 + 115,000) Blending (575 hrs x $35 = $20125=115,000) Packaging (115hrs x $35 = $4025 + 115,000) Total cost 3.8 0.7 0.06 0.13 0.024 0.35 0.175 0.035 5.27