Reference no: EM131812578

Problem - Gourmet Specialty Coffee Company (GSCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. GSCC currently has 12 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead 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, while a few of the newer blends have very low volumes. GSCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If prices for certain coffees are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price-conscious as well.

Data for the 20x5 budget include manufacturing overhead of $12,000,000, which has been allocated on the basis of each product's direct-labor cost. The budgeted direct-labor cost for 20x5 totals $1,200,000. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $5,800,000.

The expected prime costs for one-pound bags of two of the company's products are as follows:

	Jamaican	Colombian
Direct Material	$2.90	$3.90
Direct Labor	$0.40	$0.40

GSCC's controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20x5 budgeted manufacturing-overhead costs shown in the following chart.

Activity	Cost Driver	Budget Activity	Budgeted Cost
Purchasing	Purchase Orders	2316	2,316,000
Material handling	Setups	3,600	2,880,000
Quality Control	Batches	1,440	576,000
Roasting	Roasting hours	192,200	3,844,000
Blending	Blending hours	67,200	1,344,000
Packaging	Packaging hours	52,000	1,040,000
Total Manufacturing - overhead cost			12,000,000

Data regarding the 20x5 production of Jamaican and Colombian coffee are shown in the following table. There will be no raw-material inventory for either of these coffees at the beginning of the year.

	Jamaican	Colombian
Budget sales	2,000 lbs	100,000 lbs
Batch Size	500 lb	20,000 lb
Setups	3 per batch	3 per batch
Purchase Order Size	500 lb	50,000 lb
Roasting Time	1 hr per 200 lb	1hr per 200 lb
Blending Time	.5 hr per 200 lb	.5 hr. per 200 lb
Packaging Time	1 hr per 200 lb	1 hr per 200 lb

Required:

1. Using GSCC'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 Jamaican coffee and one pound of Colombian coffee.

2. Develop a new product cost, using an activity-based costing approach, for one pound of Jamaican coffee and one pound of Colombian coffee.

3. What are the implications of the activity-based costing system with respect to:

a. The use of direct labor as a basis for applying overhead to products?

b. The use of the existing product-costing system as the basis for pricing?