Project - Sioux Falls Coffee, Inc.
Sioux Falls Coffee, Inc. (SFC) processes and distributes a variety of coffee. SFC buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently the firm offers 15 coffees to gourmet shops in one-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred 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; a few of the newer brands have very low volumes. SFC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If its prices for certain coffees are significantly higher than the market, CBI lowers its prices. The company competes primarily on the quality of its products, but customers are price conscious as well.
Data for the 2017 budget include factory overhead of $3,000,000, which has been allocated by its current cost system on the basis of each product's direct labor cost. The budgeted direct labor cost for 2017 totals $600,000. The firm budgeted $6,000,000 for purchases and use of direct materials (mostly coffee beans).
The budgeted direct costs for one-pound bags of two of the company's products are as follows:
|
|
Mona Loa
|
Malaysian
|
|
Direct Materials
|
$4.20
|
$3.20
|
|
Direct Labor
|
.30
|
.30
|
SFC's controller, Wendy Weather, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the 2017 budgeted factory overhead costs:
|
Activity
|
Cost Driver
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Budgeted Activity
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Budgeted Cost
|
|
Purchasing
|
Purchase orders
|
1,158
|
$579,000
|
|
Materials handling
|
Setups
|
1,800
|
720,000
|
|
Quality 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 Factory Overhead
|
|
|
$3,000,000
|
Data regarding the 2017 production of two of its lines, Mona Loa and Malaysian, follow. There is no beginning or ending direct materials inventory for either of these coffees.
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Mona Loa
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Malaysian
|
|
Budgeted sales
|
100,000 pounds
|
2,000 pounds
|
|
Batch size
|
10,000 pounds
|
500 pounds
|
|
Setups
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3 per batch
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3 per batch
|
|
Purchase order size
|
25,000 pounds
|
500 pounds
|
|
Roasting time
|
1 hour per 100 pounds
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1 hour per 100 pounds
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|
Blending time
|
.5 hour per 100 pounds
|
.5 hour per 100 pounds
|
|
Packaging time
|
.1 hour per 100 pounds
|
.1 hour per 100 pounds
|
Complete the following requirements fully- show your computations and round to nearest cent. I highly recommend completing this assignment on Excel. Complete the spreadsheet as if it is to be read and used by a supervisor (label your information). Use Text Boxes to insert your written information and answer the questions thoughtfully and thoroughly. Save your file with your last name and project (ex. WhitleyABC) and upload to LMS.
1. Using Sioux Falls Inc.'s current product costing system,
a. Determine the company's predetermined overhead rate using direct labor cost as the single cost driver.
b. Determine the total product costs and selling pricesof one pound of Mona Loa coffee and one pound of Malaysian coffee (materials, labor, and applied overhead).
2. Using an activity-based costing approach, develop a new product cost for one pound of Mona Loa coffee and one pound of Malaysian coffee (calculate budgeted activity rates and then apply to each product).
a. Determine the activity rate for each overhead activity.
b. Determine the total product costs of one pound of Mona Loa coffee and one pound of Malaysian coffee using the activity rates (materials, labor, and applied activity rates).
3. Compare the current system results with the ABC results.What are the implications of the activity-based costing system with respect to SFC's pricing and product mix strategies? How does ABC add to SFC's competitive advantage?
4. Assume now that Mona Loa and Malaysian are the only two products at SFC. Also, now include the following additional information about the practical capacity Sioux Falls Coffee has in each of its activities. For example, currently SFC has total practical capacity for processing 1,400 purchase orders, 2,400 setups, etc. These are the levels of activity work that are sustainable.
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Activity
|
Practical Capacity
|
|
Purchasing
|
1,400
|
|
Materials handling
|
2,400
|
|
Quality control
|
1,200
|
|
Roasting
|
100,000
|
|
Blending
|
36,000
|
|
Packaging
|
30,000
|
5. For each activity, determine the activity rates based on practical capacity, current usage percentage, and the cost of unused capacity. Also indicate the total cost of unused capacity.
6. Explain the strategic role of the information you have developed in part 5.
7. Assume the same information used in parts 5 and 6, but now assume also that the costs in the purchasing activity consists entirely of the cost of 8 employees; the cost in materials handling consists entirely of the cost of 20 employees; the cost of quality control consists entirely of the cost of 4 employees; the cost of roasting and blending consists entirely of the costs of machines - 10 roasting machines and 10 blending machines; and the cost of packaging consists entirely of the cost of 3 employees. In your analysis assume that each employee (or machine) contributes an equal share to the work of the activity. How many "unused" employees/machines do you have? Based on this additional information, what can you now advise management about utilization of capacity?