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 offers a large variety of different coffees that it sells to gourmet shops in one-pound bags. The major cost of the coffee is raw materials. However, the company’s predominantly automated roasting, blending, and packing processes require 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 the newer blends sell in very low volumes.

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.

The expected costs for direct materials and direct labor for onepound bags of two of the company’s coffee products appear below.

Mona Loa Malaysian

. . . . . . . . . $4.20 $3.20

$0.30 $0.30 page 187 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 overhead costs, as shown in the following table:

Data regarding the expected production of Mona Loa and Malaysian coffee are presented below. There will be no raw materials inventory for either of these coffees at the beginning of the year.

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 the Mona Loa coffee and one pound of the Malaysian coffee.

2. Using activity-based costing as the basis for assigning manufacturing overhead cost to products, do the following:

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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 part (2a) above, compute the amount of manufacturing overhead cost per pound of the Mona Loa coffee and the Malaysian coffee. Round all computations to the nearest whole cent.

c. Determine the unit product cost of one pound of the Mona Loa coffee and one pound of the Malaysian coffee.

3. Write a brief memo to the president of CBI explaining what you have found in parts (1) and (2) above and discussing the implications to the company of using direct labor as the base for assigning manufacturing overhead cost to products.

(CMA, adapted)