Activity-based costing, cost hierarchy. (CMA, adapted) Coffee Bean, Inc. (CBI) is a distribu¬

tor and processor of a variety of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. CBI currently offers 15 different coffees to gourmet shops in one-kilogram bags. The major cost is raw materials;

however, there is a substantial amount of manufacturing overhead in the predominandy auto¬
mated roasting and packing process. The company uses relatively little direct labour.
Some of the coffees are very popular and sell in large volumes, while a few ofthe newer blends have very low volumes. CBI prices its coffee at budgeted cost, including allocated overhead, plus a markup of 30%. If prices for certain coffees are significantly higher than market, the prices are lowered. The company competes primarily on the quality of its prod¬
ucts, but customers are price-conscious as well.
Data for the 2007 budget include manufacturing overhead of $3.6 million, which has been allocated in the existing costing system based on each product’s budgeted direct labour cost. The budgeted direct labour cost for 2007 totals $720,000. Purchases and use of materi¬
als (mostly coffee beans) are budgeted to total $7.2 million.
The budgeted direct costs for one-kilogram bags of two of the company’s products are:
Mona Loa Malaysian Direct materials $5.04 $3.84 Direct labour 0.36 0.36 CBI’s controller believes the traditional costing system may be providing misleading cost information. $he has developed an activity-based analysis of the 2007 budgeted manufactur¬
ing overhead costs shown in the following table:
Activity Cost Allocation Activity Budgeted Cost Purchasing Purchase orders 1,158 $ 694,800 Materials handling Setups 1,800 864,000 Quality control Batches 600 172,800 Roasting Roasting-hours 96,100 1,153,200 Blending Blending-hours 33,600 403,200 Packaging Packaging-hours 26,000 312,000 Total manufacturing overhead cost $3,600,000 Data regarding the 2007 production of Mona Loa and Malaysian coffee are presented here.
There will be no beginning or ending materials inventory for either of these coffees.
Mona Loa Malaysian Expected sales 100,000 kilograms 2,000 kilograms Batch size 10,000 kilograms 500 kilograms Setups 3 per batch 3 per batch Purchase order size 25,000 kilograms 500 kilograms Roasting time 1 hour/100 kilograms 1 hour/100 kilograms Blending time 0.5 hour/100 kilograms 0.5 hour/100 kilograms Packaging time 0.1 hour/100 kilograms 0.1 hour/100 kilograms C%ri^
Budgeted Instructions Form groups of two or more students to complete the following requirements.
Required 1. Using Coffee Bean, Inc.’s existing costing approach,

a. Determine the company’s 2007 budgeted manufacturing overhead rate using directlabour cost as the single allocation base.

b. Determine the 2007 budgeted costs and selling prices of one kilogram of Mona Loa coffee and one kilogram ofMalaysian coffee.
2. Use the controller’s activity-based approach to estimate the 2007 budgeted cost for one kilogram of

a. Mona Loa coffee

b. Malaysian coffee Allocate all costs to the 100,000 kilograms of Mona Loa and the 2,000 kilograms of Malaysian. Compare the results with those in requirement 1.
3. Discuss how CBI could use a cost hierarchy approach to better understand its cost structure.
4.Examine the implications ofyour answers to requirements 2 and 3 for CBI’s pricing and product emphasis strategy.