CASE 2A-6 Activity-Based Absorption Costing and Pricing LO2-5 Java Source, Inc., (JSI) buys coffee beans from around the world and roasts, blends, and packages them for resale. Some of JSI's coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. JSI prices its coffees at manufacturing cost plus a markup of 25%. For the coming year, JSI's budget includes estimated manufacturing overhead cost of $2,200,000. JSI 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 one-pound bags of two of the com- pany's coffee products appear below. Kenya Dark Viet Select Direct materials. $4.50 $2.90 Direct labor (0.02 hours per bag) $0.34 $0.34 JSI's controller believes that the company's traditional costing system may be providing mis- leading 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: Activity Cost Pool Purchasing...... Material handling Quality control. Expected Activity for the Year 2,000 orders 1,000 setups Expected Cost for the Year $ 560,000 193,000 Roasting Blending. Activity Measure Purchase orders Number of setups Number of batches Roasting hours Blending hours Packaging Packaging hours 500 batches 95,000 roasting hours 32,000 blending hours 24,000 packaging hours 90,000 1,045,000 192,000 120,000 Total manufacturing overhead cost $2,200,000 Data regarding the expected production of Kenya Dark and Viet Select coffee are presented below. Expected sales Batch size Setups... Purchase order size Roasting time per 100 pounds Blending time per 100 pounds Packaging time per 100 pounds Required: Kenya Dark Viet Select 80,000 pounds 5,000 pounds 4,000 pounds 2 per batch 20,000 pounds 1.5 roasting hours 0.5 blending hours 0.3 packaging hours 500 pounds 2 per batch 500 pounds 1.5 roasting hours 0.5 blending hours 0.3 packaging hours 1. Using direct labor-hours as the manufacturing overhead cost allocation base, do the following: a. Determine the plantwide predetermined overhead rate that will be used during the year. b. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee. 2. Using the activity-based absorption costing approach, do the following: a. Determine the total amount of manufacturing overhead cost assigned to Kenya Dark cof- fee and to Viet Select coffee for the year. b. Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of Kenya Dark coffee and Viet Select coffee. c. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee. 3. Write a brief memo to the president of JSI that explains what you found in (1) and (2) above and that discusses the implications of using direct labor-hours as the only manufacturing over- head cost allocation base.