Biashara (Pty) Ltd is a producer of high grade coffee roasts. The company buys coffee beans from Ethiopia (Buna) and Kenya (Kahawa). The coffee beans are then roasted, blended and packaged in one kilogram bags for sale to specialist coffee houses around the world. The major raw material in the coffee blends is the beans and the company's automated roasting, blending and packaging processes' have substantial overheads. Since the company is highly automated it uses very little direct labour. One kilogram of coffee beans yields one kilogram of roasted and blended coffee.

The budget for the coming year includes fixed production overhead costs of R3 300 000. Production overheads are applied using direct labour hours at the moment. The expected direct labour cost is R2 500 000 and the total budgeted direct labour hours are 18 334 hours. The above-mentioned labour costs are considered a variable cost.

The Buna coffee beans cost R25 per kilogram while the Kahawa coffee beans cost R22 per kilogram. Each kilogram of roasted and blended coffee requires six minutes of labour. Packaging is R5 per kilogram of the Buna roast and it is 20% cheaper for the Kahawa roast.

Mr Tsi Binkie, the sales director, has just returned from an executive course at the Johannesburg Business School and has learnt that activity-based costing is more accurate than applying overheads using direct labour hours. He thinks this should be investigated.

The following fixed overhead cost information was compiled by a costing analyst:

Cost Pool

Cost

Cost driver

Ordering

R330 000

Purchase Orders

Material handling

R655 000

Number of set-ups

Roasting and blending

R1 545 000

Roasting and blending hours

Packaging

R770 000

Packaging Hours

R3 300 000

Buna

Kahawa

Planned production and sales

80 000 kg

30 000 kg

Number of setups

32 setups

30 setups

Purchase order size

20 000kg per order

5 000 kg per order

Roasting and blending hours

15 000 hours

10 000 hours

Packaging time

2 400 hours

900 hours

REQUIRED:

4.1

Using direct labour hours as the base for applying manufacturing overhead cost to products, do the following:

4.1.1 Calculate the predetermined overhead rate that will be used during the upcoming year.

4.1.2 Calculate the unit product cost of one kilogram each of the Buna and Kahawa roasts.

4.1.3 Discuss whether you agree with direct labour hours being used as a base to apply manufacturing overheads. Should you not agree, recommend a more appropriate traditional base for Biashara to use.

(2)

(5)

(3)

4.2

Using activity-based costing as a basis for applying manufacturing overhead cost to products, calculate the total amount of manufacturing overhead cost assigned to the Buna and Kahawa roasts for the year.

(12)

4.3

The most critical step in activity-based costing is identifying cost drivers. Define a cost driver and briefly discuss whether you agree with this statement or not.