Reference no: EM132962605

Question - World Gourmet Coffee Company (WGCC) 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. WGCC has 15 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. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30%. The company competes primarily on quality, but customers are somewhat price-conscious as well.

Data for the 2012 budget include manufacturing overhead of $3,000,000, which has traditionally been allocated to products based on budgeted direct labor cost. The budget for direct labor cost for 2012 is $600,000. Budgeted direct raw material (mostly coffee beans) costs total $6,000,000.

The expected material and labor costs for one-pound for two of the company's products are as follows:

(a) Using the company's current direct-labor based product-costing system:

i. Determine the company's predetermined overhead rate using direct-labor cost as the cost driver.

ii. Determine the full product costs and selling prices of one pound of Kona and one pound of Malaysian Coffee.

b. Using an activity based costing approach based on information provided, determine the full product costs and selling prices of one pound of Kona and one pound of Malaysian Coffee.

c. Based on your answers to parts 1 and 2 above in the context of WGCC, what are the implications of using the activity-based costing system relative to the existing product-cost system as the basis for pricing?