5-42 Volume-Based Costing versus ABC Coffee Bean Inc. (CBI) processes and distributes a variety of coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently, the firm offers 15 coffees to gourmet shops in 1-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred 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; a few of the newer brands have very low volumes. CBI prices its coffee at full product cost, including allocated overhead, plus a markup of 30%. If its prices for certain coffees are significantly higher than the market, CBI lowers its prices. The company competes primarily on the quality of its products, but customers are price conscious as well. Data for the current budget include factory overhead of $3,000,000, which has been allocated on the basis of each product's direct labor cost. The budgeted direct labor cost for the current year totals $600,000. The firm budgeted $6,000,000 for purchase and use of direct materials (mostly coffee beans). The budgeted direct costs for 1-pound bags of two of the company's many products are as follows Direct materials Direct labor. Mona Loa $4.20 0.30 Malaysian $3.20 0.30 CBI's controller, Mona Clin, believes that its current product costing system could be providing a leading cost information. She has developed this analysis of the current year's budgeted factory over- head costs: Cost Driver Purchase orders Activity Purchasing Materials handling Quality control Setups Budgeted Driver Consumption 1,158 1,800 Batches 720 Roasting Roasting hours 96.100 Blending Blending hours 33,600 Packaging Packaging hours 26,000 Total factory overhead cost Budgeted Cost $ 579,000 720,000 144,000 961,000 336,000 260,000 $3,000,000 Data regarding the current year's production of just two of its lines, Mona Loa and Malaysian, follow. There is no beginning or ending direct materials inventory for either of these coffees. Required Budgeted sales Batch size Setups Purchase order size Roasting time Blending time Packaging time Mona Loa 100,000 pounds 10,000 pounds 3 per batch 25,000 pounds 1 hour per 100 pounds 0.5 hour per 100 pounds 0.1 hour per 100 pounds 1. Using Coffee Bean Inc.'s current product costing system. Malaysian 2,000 pounds 500 pounds 3 per batch 500 pounds 1 hour per 100 pounds 0.5 hour per 100 pounds 0.1 hour per 100 pounds a. Determine the company's predetermined overhead rate using direct labor cost as the single cost driver. b. Determine the full product costs and selling prices of one pound of Mona Loa coffee and one pound of Malaysian coffee. 2. Using an activity-based costing approach, develop a new product cost for 1 pound of Mona Loa coffee and I pound of Malaysian coffee. Allocate all overhead costs to the 100,000 pounds of Mona Loa and the 2.000 pounds of Malaysian. Compare the results with those in requirement 1. 3. What are the implications of the activity-based costing system with respect to CBI's pricing and product mix strategies? How does ABC add to CBI's competitive advantage? (CMA Adapted)