Activity-Based Costing
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 fell' of the newer blends nave 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 20x1 budget include manufacturing overhead of S3.000.000. which has been allocated on the basis of each product's direct-labor cost. The budgeted direct-labor cost for 20xI totals $600.000. Based on the sales budget and raw-material budget. purchases and use of raw materials (mostly coffee beans) will total $6.000,000.
The expected prime costs for one-pound bags of two of the company's products are as follows:
Kona | Malaysian | |
Direct material | $3.20 | $4.20 |
Direct labor | .30 | .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 | Cost Driller | Budgeted Activity | Budgeted Cost |
Purchasing | Purchase orders | 1,158 | $579,000 |
Material handling | Setups | 1,800 | 720,000 |
Duality 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 manufacturing-overhead cost | $3,000,000 | ||
Data regarding the 20x1 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.
Kana | Malaysian | |
Budgeted sales | 2,000 lb. | 100,000 lb. |
Batch size | 500 1b, | 10,000 lb. |
Setups | 3 per batch | 3 per batch |
Purchase order size | 500 lb. | 25,000lb. |
Roasting time | 1hr. per 100 lb. | 1hr. per 100lb. |
Blending time | .5 hr. per 100 lb. | .5 hr. per 100 lb. |
Packaging time | .1hr. per 100 lb. | I hr. per 100 Ib, |
Required:
1. Using WGCCs 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 Kana coffee and one pound of Malaysian coffee.
2. Develop a new product cost, using an activity-based costing approach, for one pound of Kana coffee and one pound of Malaysian coffee.
3. What are the implications of the activity-based costing system with respect to
a. The use of direct labor as a basis for applying overhead to products?
b. The use of the existing product-costing system as the basis for pricing?
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