Reference no: EM131799726

Question - 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	0.4	0.4

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	Budgeted Activity	Budgeted Cost
Purchasing	Purchase orders	2,316	$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	Jamaican	Colombian
Budgeted sales	2,000	100,000
Batch size	500	20,000
Setups	3 per batch	3 per batch
Purchase order size	500	50,000
Roasting time	1 hr. per 200	1 hr. per 200
Blending time	5 hr. per 200	.5 hr. per 200
Packaging time	1 hr. per 200	.1 hr. per 200

Required - Using GSCC's current product-costing system: Determine the company's predetermined overhead rate using direct-labor cost as the single cost driver.