Activity-Based Costing as an Alternative to Traditional Product CostingCoffee Bean, Inc. (...

Activity-Based Costing as an Alternative to Traditional Product Costing

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 currently has 40 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 process requires 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 have very low volumes. CBI prices its coffee eat manufacturing cost plus a markup of 30%. If CBI’s prices for certain coffees are significantly higher than market, adjustments are made to bring CBI’s prices more into alignment with the market because customers are somewhat price conscious.

For the coming year, CBI’s budget includes estimated manufacturing overhead cost of $3,000,000. CBI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $600,000, which represents 50,000 hours of direct labor time. Based on the sales budget and expected raw materials costs, the company will purchase and use $6,000.000 of raw materials (mostly coffee beans) during the year. The expected costs for direct materials and direct labor for one-pound bags of two of the company’s coffee products appear below.

CBI’s controller believes that the company’s traditional costing system may be providing misleading cost information. To determine whether or not this correct, the controller has prepared an analysis of the year’s expected manufacturing overhead costs as shown in the following table:

Data regarding the expected production of Mona Loa and Malaysian coffee arc presented below.

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 Mona Loa coffee and one pound of 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 (2a) above, compute the amount of manufacturing overhead cost per pound of Mona Loa coffee and Malaysian coffee. Round all computations to the nearest whole cent.

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

3. Write a brief memo to the president of CBI explaining what you have found in (1) and (2) above and discussing the implications to the company of using direct labor as the base for assigning manufacturing overhead cost to products.