Activity-Based Costing

Laurence Coffee Ltd. makes two types of coffee, Gourmet and Espresso, and applies overhead on the basis of direct-labor hours when the traditional costing system is used. Anticipated manufacturing overhead for the upcoming accounting period is $350,000. Information about the products follows.

Product Selling Price DM (Coffee beans) DL # of Packs estimated and made

Gourmet $38 $5 1hrs/pack @$12/hr 20,000

Espresso $60 $10 1.5hrs/pack @$12/hr 10,000

Further investigations show that Brown's manufacturing overhead of $350,000 consist of:

Total cost

Setups $68,000

Machine depreciation 100,000

Electricity (machinery) 60,000

Product inspection 40,000

Maintenance 80,000

,and Brown's pays factory insurance $2,000 (only for Espresso) annually.

The costs in the table are driven by number of Setups, machine hours worked, and the number of inspections, respectively. Data relevant to these activities follow.

Product Number of Setups Number of inspections

Gourmet 200 200

Espresso 300 800

Maintenance is performed prior to each production run. Each production run can produce 250 packs of Gourmet coffee or 150 packs of Espresso. Espresso used 45% of the 40,000 total machine hours.

Moreover, 60% of office personnel's job is to record the results of inspections. Their salary in this coming accounting period is $10,000. They spend rest of their time to deal with customers. (Assume actual activities are the same as estimated activities.)

Required:

1. Calculate the cost per unit of each product using traditional costing method, assuming use

of direct-labor hours to apply overhead to production.

2.Assuming use of activity-based costing, compute the unit costs of the Gourmet and

Espresso coffee. (Please round to two decimals for the unit costs.)

3. By using direct-labor hours as an application base, which product is over-costed and

which product is under-costed? Calculate the total amount of cost distortion for each

product.

4. In January 2017 Britt Coffee house has requested 1,100 packs of Espresso for its coffee

shops. You want the "free marketing" that this will provide so you are willing to offer

them 1,100 packs Espresso at a price equal to your "cost". Please calculate and explain

any additional Maintenance costs for the 1,100 packs of Espresso.