Reference no: EM13485080

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-pund 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 their 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 the 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 materials costs, the company will purchase and use $6,000,000 of raw materials (mostly coffee beans) during the year.

The expected cost for direct materials and direct labor for one-pound bags of two of the company's coffee products appear below.

	Mona Loa	Malaysian
Direct materials	$4.20	$3.20
Direct labor (0.025 hours per bag)	$0.30	$0.30

CBI'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 overthead cost, as shown in the following table:

Activity cost pool	Activity measure	Expected Activity for the year	Expected cost for the year
Purchasing	Purchase orders	1,710 orders	$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 hours	$961,000
Blending	Blending hours	33,500 blending hours	$402,000
Packaging	Packaging hours	26,000 packaging hours	$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	Malaysian
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	0.5 hour	0.5 hour
Packaging time per 100 pounds	0.1 hour	0.1 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 Malaysian Coffee.

2.Using activity-based costing as the basis for asssigning 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 (2A) above, compute the amount of manufacturing overhead cost per pound of Mona Loa coffee an Malaysian coffee. Round all computations to the nearest whole cent.
• (C) Determine the unit cost of one pound of Mona Loa coffee and one pound of Malaysian coffee.