Reference no: EM132224468

Problem - Volume-Based Costing versus ABC

Coffee Bean Inc. (CBI) processes and distributes a variety of coffee. CBI 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 1-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. CBI prices its coffee at full product cost, including allocated overhead, plus a markup of 30%. 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 current budget include factory overhead of $2,000,000, which has been allocated on the basis of each product's direct labor cost. The budgeted direct labor cost for the current year totals $590,000. The firm budgeted $5,000,000 for purchase and use of direct materials (mostly coffee beans).

The budgeted direct costs for 1-pound bags of two of the company's many products are as follows:

	Mona Loa	Malaysian
Direct materials	$4.20	$3.20
Direct labor	0.30	0.30

CBI's controller, Mona Con, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the current year's budgeted factory overhead costs:

Activity	Cost Driver	Budgeted Activity	Budgeted Cost
Purchasing	Purchase orders	1,058	$569,000
Materials handling	Setups	1,700	710,000
Quality control	Batches	620	134,000
Roasting	Roasting hours	95,100	951,000
Blending	Blending hours	32,600	326,000
Packaging	Packaging hours	25,000	250,000
Total factory overhead cost			$2,940,000

Data regarding the current year's production of just two of its lines, Mona Loa and Malaysian, follow. There is no beginning or ending direct materials inventory for either of these coffees.

	Mona Loa	Malaysian
Budgeted sales	101,000 pounds	1,900 pounds
Batch size	9,000 pounds	400 pounds
Setups	3 per batch	3 per batch
Purchase order size	24,000 pounds	400 pounds
Roasting time	1 hour per 100 pounds	1 hour per 100 pounds
Blending time	0.5 hour per 100 pounds	0.5 hour per 100 pounds
Packaging time	0.1 hour per 100 pounds	0.1 hour per 100 pounds

Required:

1. Using Coffee Bean 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 full product costs and selling prices of one pound of Mona Loa coffee and one pound of Malaysian coffee.

2. Using an activity-based costing approach, develop a new product cost for 1 pound of Mona Loa coffee and 1 pound of Malaysian coffee. Allocate all overhead costs to the 101,000 pounds of Mona Loa and the 1,900 pounds of Malaysian.