Determine the unit product cost of one pound of blue coffee

Question

Question 1

Golden Tech Access had no work in process inventory or finished goods Inventory at the beginning of October. The company reported that Job GT1 and GT5 were conducted in the month. Job GT1 was completed and sold at the end of the month and Job GT5 was incomplete. The company uses direct labor hours as the basis of the predetermined manufacturing overhead rate. The following additional information for both Job GT1 and Job GT5 in the month of October is available:

	RM	Hours
Estimated total fixed manufacturing overhead	24,500
Estimated total fixed manufacturing overhead per direct labor hours	5
Estimated total direct labor hours		3,700
Total actual total manufacturing overhead costs incurred	43,000

 

	Job GT1	Job GT5
	RM	RM
Direct materials	30,000	21,000
Direct Labor	18,000	6,000
	Hours	Hours
Actual direct labor hours	2,900	700

Required

1. What is the company's pre-determine manufacturing overhead rate?

2. How much manufacturing overhead cost was allocated to Job GT1 and Job GT5?

3. Is there any over-allocation or under-allocation of manufacturing overhead cost? If so, what is the amount of over-allocation or under-allocation?

4. Compute the finished goods inventory for Job GT1.

Question 2

Kulit Craft Sdn Bhd manufactures  leather  goods. The Company's profits have been declining over the past few months. Management is concern over the decline in profits and is examining each of its product line closely to determine the reason for the decline.

One of the Company's main product is leather belts. The belts are produced in a single continuous process in it's  factory in Kajang. During the manufacturing process, the leather strips are sewn, punched and dyed. The belts then enter a final finishing stage to conclude the manufacturing process. Labor and overheads are continually applied during the manufacturing process. All materials are added at the beginning of the process and the company uses a weighted-average method to calculate unit cost.

The leather belts produced at the Kajang Factory are sold to wholesalers at a price of RM 14.50 Management wants to compare the current manufacturing cost to the wholesale price. Management has a policy to earn at least 25% margin above cost to ensure that the overall profitability of the Company is maintained. Currently, the cost per belt used for planning and control purposes is RM 11.50.

Top management has asked the factory accountant in Kajang to submit the relevant data on the cost of manufacturing the leather belts for the month of October.

These cost data will be used to determine whether modifications in the production process should be initiated or whether an increase in selling price is justified.

The factory accountant submitted the following data:

The work in process inventory consist of 500 partially completed units on 1^st October. The belts were 30% complete as to conversion. The cost included in the Inventory on 1^st October  is as follows:

	RM
Leather strips	1,650
Buckles	350
Direct labor	500
Manufacturing Overhead	2,000
Total Cost	4,500

During the month of October, 8,000 leather strips were started into production. A total of 8,100 leather belts were completed. The work-in-process inventory on 30^th October consisted of 400 belts that were 40% complete as to conversion.

The costs charged to production during the month of October is as follows:

	RM
Leather strips	41,000
Buckles	8,000
Direct labor	15,800
Manufacturing Overhead	39,520
Total Cost	104,320

Required

1. In order to provide cost data on the manufacture of leather belts in the Kajang factory to top management, calculate the following amounts for the month of October:

(a) Equivalents units of material and conversion cost.

(b) Cost per equivalent units for material; conversion cost and total unit cost.

(c) Assignment of production cost to leather belts completed and transferred out and to the October 31 ending work in process.

(d) Compare the total unit cost for the leather belt and the current selling price. Draft a MEMO to the CEO of Kulit Craft  and include the following:

     (i) Why the profits of the company has been declining.

     (ii) The proposed revised new selling price for leather belts.

     (iii)  Recommendations.

Question 3

Kopi Tarik Sdn Bhd (KPSB) 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. KPSB offers a large variety of 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 processes require a substantial amount of overhead. The company uses relatively little direct labor.

Some of KPSB's coffee are very popular and sells in large volumes, while a few of the newer blends sells in very low volumes. KPSB prices its coffees at manufacturing cost plus a markup of 25% with some adjustments made to keep the company's prices competitive.

For the coming year, KPSB's budget includes estimated manufacturing overhead cost of RM2,200,000. KPSB assigns manufacturing overhead to products on the basis of direct labor hours. The expected direct labor cost totals RM 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 $5,000,000 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 products appear below:

	Blue Coffee (RM)	White Coffee (RM)
Direct materials	4.50	2.90
Direct labor (0.02 hrs per bag)	0.24	0.24

KPSB's controller believes that the company's traditional costing system may be providing misleading 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 shown in the table below:

Activity Cost Pool	Activity Measure	Expected Activity for the Year	Expected Cost For the Year (RM)
Purchasing	Purchase Orders	2,000 orders	560,000
Material Handling	Number of Setups	1,000 setups	193,000
Quality Control	Number of batches	500 batches	90,000
Roasting	Roasting hours	95,000 roasting hours	1,045,000
Blending	Blending hours	32,000 blending hours	192,000
Packaging	Packaging hours	24,000 packaging hours	120,000
Total Manufacturing Overhead Cost			2,200,000

Data regarding the expected production of Blue Coffee and White Coffee are presented below:

	Blue Coffee	White Coffee
Expected Sales (Production)	80,000 pounds	4,000 pounds
Batch Size	5,000 pounds	500 pounds
Set up	2 per batch	2 per batch
Purchase order size	20,000 pounds	500 pounds
Roasting time per 100 pounds	1.5 roasting hrs	1.5 roasting hrs
Blending time per 100 pounds	0.5 blending hrs	0.5 blending hrs
Packaging time per 100 pounds	0.3 packaging hrs	0.3 packaging hrs

Required

1. Using direct labor hours as the base for assigning manufacturing overhead cost to the products:

(a) Determine the predetermined overhead rate that will be used during the year

(b)   Determine the unit product cost of one pound of Blue Coffee and one pound of White Coffee.

2. Using activity - based costing as the basis for assigning manufacturing overhead cost to products:

(a) Determine the total amount of manufacturing overhead cost assigned to Blue Coffee and White Coffee for the year. Please show all schedules & workings.

(b) Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of the Blue Coffee and the White Coffee. Round up to the nearest whole cents.

(c) Determine the unit product cost of one pound of Blue Coffee and one pound of White Coffee.

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