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 20 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 20x1 budget include manufacturing overhead of $14,725,600, which has been allocated on the basis of each product's direct-labor cost. The budgeted direct-labor cost for 20x1 totals $1,472,560. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $6,300,000. The expected prime costs for one-pound bags of two of the company's products are as follows: Direct material Direct labor Kona $3.40 0.30 Malaysian $4.40 0.30 WGCC's controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20x1 budgeted manufacturing-overhead costs shown in the following chart. Activity Purchasing Material handling Quality control Roasting Blending Packaging Total manufacturing- overhead cost Cost Driver Purchase orders Setups Batches Roasting hours Blending hours Packaging hours Budgeted Activity 2,441 3,800 1,540 197,200 69,200 54,500 Budgeted Cost $ 2,685,100 3,325,000 693,000 4,930,000 1,730,000 1,362,500 $ 14,725,600

Answer 1

1.a Overhead rate using Direct-labor co Total Manufacturing Overheads Direct Labour Cost 14725600 = 10:1 Overhead Rate 1472560 1.b Computation of full product costs and selling prices of one pound of Kona coffee and one pound of Malaysian coffee Kona Coffee Malaysian Coffee 3.4 4.4 0.3 0.3 Particulars i) Raw Material Cost ii) Direct-Labor Cost iii) Manufacturing Overhead (iix10) iv) Total Cost (i+ji+jii) v) Mark up @20% of Total Cost vi) Selling Price (iv+v) 3 7.71 6.7| 1.34. 8.04 1.54 9.24

Working Note-1 Computation of Activity Cost Driver Rate Activity Cost Driver (A) (B) i) Purchasing ii) Material handling iii) Quality Control iv) Roasting v) Blending vi) Packaging Total Manufacturing Overhead Purchase orders Setups Batches Roasting hours Blending hours Packaging hours Budgeted Activity (C) 2441 3800 1540 197200 69200 54500 Budgeted Cost (D) 26,85,100.00 33,25,000.00 6,93,000.00 49,30,000.00 17,30,000.00 13,62,500.00 1,47,25,600.00 Activity Cost Driver Rate (E) = D=0 1,100.00 875.00 450.00 25.00 25.00 25.00

Working Note-2 Kona 3,000 750 Malaysian 1,05,000 21,000 3 750 52,500 0.5 Particualrs a) Budgeted Sales (lb) b) Batch Size (lb) c) Setups per Batch d) Purchase Order Size (lb) e) Roasting Time in hours per 100 lb |f) Blending Time in hours per 100 lb | g) Packaging Time in hours per 100 lb | h) No. of Batches (a+b) i) Total Setups (hxc) j) No. of Purchase orders (a-d) k) Total Roasting Hours (exa/100lb) 1 Total Blending Hours (fxa/100lb) m) Total Packaging Time (gxa/100lb) 0.5| 0.1 4 12 4 30 15 15 2 1,050 525 1 05 3

Working Note-3 Computation of Manufacturing Overhead Costs Activity Cost Driver Activity Cost Driver Rate Kona Coffee Malaysian Coffee i) Purchasing Purchase orders 1,100.00 4,400.00 2,200.00 ii) Material handling Setups 875.00 10,500.00 13,125.00 iii) Quality Control Batches 450.00 1,800.00 2,250.00 iv) Roasting Roasting hours 25.00 750.00 26,250.00 v) Blending Blending hours 25.00 375.00 13,125.00 vi) Packaging Packaging hours 25.00 75.00 2,625.00 17,900.00 59,575.00 Working Note Reference Note-2(j) Note-2(i) Note-2(h) Note-2(k) Note-2(0) Note-2(m)

Computation of Total Prouct Cost Particulars Budgeted Sales (lb) Raw Material Cost Direct-Labor Cost Kona Coffee Malaysian Coffee 3,000 1,05,000 10,200.0 4,62,000.0 (3.4 per lb] [4.4 per Ib] 900.0 31,500.0 [0.3 per Ib] [0.3 per lb] 17,900.00 59,575.00 29,000.00 5,53,075.00 9.67 5.27 Manufacturing Overheads Cost Total Cost Cost per lb