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 at 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 material 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 Mona Loa -- Direct materials $4.20; Direct labor (.025 hours per bag) $.30 Malaysia -- Direct materials $3.20; Direct labor (.025 hours per bag) $.30 CBI's controller believes that the company's traditional costing system may be providing leading cost information. To determine whether or not this is correct, the controller has prepared an analysis of the year's expected manufacturing overhead costs as show in the following table: Activity Cost Pool Activity Measures Expected Activity for the year Expected Cost for the yr Purchasing Purchase Orders 1710 setups $513,000 Material Handling Number of setups 1,800 setups 720,000 Quality Control Number of batches 600 batches 144,000 Roasting Roasting hours 96,100 roasting hrs 961,000 Blending Blending hours 33,500 blending hrs 402,000 Packaging Packaging hours 26,000 packaging hrs 260,000 Total manufacturing overhead cost $3,000,000 Data regarding the expected production of Mona Loa and Malaysian coffee are presented below: MONA LOA MALAYSIA Expected sales 100,000 pounds 2,000 pounds Batch size 10,000 pounds 500 pounds Setups 3 per batch 3 per batch Purchase order size 20,000 pounds 500 pounds Roasting time per 100 pounds 1.0 hour 1.0 hour Blending time per 100 pounds .5 hour .5 hour Packaging time per 100 pounds .1 hour .1 hour
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 Malaysia 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 2(a) 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.