Case Analysis: ABC as an Alternative to Traditional Product Costing Soylent Coffee is a processor and distributor of a variety of blends of coffee. Its best sellers are Soylent Red and Soylent Green. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. Soylent currently has 30 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 process requires a substantial amount of manufacturing overhead. The company uses relatively little direct labour. Some of Soylent coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. Soylent prices its coffee at manufacturing cost plus a mark-up of 30%. If Soylent's prices for certain coffees are significantly higher than market, adjustments are made to bring Soylent's prices more into alignment with the market because customers are somewhat price conscious. For the coming year, Soylent's budget includes estimated manufacturing overhead cost of $9,000,000. Soylent assigns manufacturing overhead to products on the basis of direct labour-hours. The expected direct labour cost totals $1,200,000, which represents 180,000 hours of direct labour time. Based on the sales budget and expected raw materials costs, Soylent will purchase and use $12,000,000 of raw materials of mostly coffee beans during the year. The expected costs for direct materials and direct labour for one-pound bags of two of the company's products appear below: Direct materials Direct labour (0.10 hours per bag) Soylent Red Coffee $8.40 $0.60 Soylent Green Coffee $6.40 $0.60 Soylent'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 prepared the following analysis of the year's expected manufacturing overhead costs, as shown in the following table: Activity cost pool Activity measure Expected activity for the Expected cost for the year year Purchasing Purchase orders 6,000 orders $1,200,000 Materials handling Number of setups 5,500 setups $2,240.000 Quality control Number of batches 2,000 batches $320,000 Roasting Roasting hours 240,000 hours $2,400,000 Blending Blending hours 160,000 hours $2,000,000 Packaging Packaging hours 42,000 hours $840,000 Total factory overhead $9,000,000 Data regarding expected production are presented below: Soylent Red Coffee Soylent Green Coffee Expected sales 140,000 pounds 3,000 pounds Data regarding expected activities are presented below: Batches Setups Purchase order size Roasting time per 200 pounds Blending time per 200 pounds Packaging time per 200 pounds Soylent Red Coffee 20 batches 60 setups 10 orders 1,400 hours 700 hours 140 hours Soylent Green Coffee 8 batches 24 setups 8 orders 30 hours 15 hours 3 hours a. Determine the cost of a unit of coffee (Red and Green) using the traditional overhead allocation method. A unit of coffee is a one-pound bag. The unit cost will include direct materials, direct labour, and factory overhead (as determined using the predetermined overhead rate). b. Determine the cost of a unit of coffee (Red and Green) using ABC. As with the traditional method, you will need to show direct materials, direct labour and manufacturing overhead (as determined using ABC). c. Link the numbers to Parts 1 and 2 whenever possible. Show a side-by-side comparison of unit product costs calculated under each method (show the unit product cost of each type of coffee using both traditional and ABC costing). Unit product costs include direct materials, direct labour and manufacturing overhead costs on a per unit basis. Furthermore, determine the changes in the profit margins for each bag of coffee under both methods (the sales price mark-up % is given). How much was the company losing per bag of the Red and Green under the Traditional Method? d. Draw your conclusion. Case Analysis: ABC as an Alternative to Traditional Product Costing Soylent Coffee is a processor and distributor of a variety of blends of coffee. Its best sellers are Soylent Red and Soylent Green. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. Soylent currently has 30 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 process requires a substantial amount of manufacturing overhead. The company uses relatively little direct labour. Some of Soylent coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. Soylent prices its coffee at manufacturing cost plus a mark-up of 30%. If Soylent's prices for certain coffees are significantly higher than market, adjustments are made to bring Soylent's prices more into alignment with the market because customers are somewhat price conscious. For the coming year, Soylent's budget includes estimated manufacturing overhead cost of $9,000,000. Soylent assigns manufacturing overhead to products on the basis of direct labour-hours. The expected direct labour cost totals $1,200,000, which represents 180,000 hours of direct labour time. Based on the sales budget and expected raw materials costs, Soylent will purchase and use $12,000,000 of raw materials of mostly coffee beans during the year. The expected costs for direct materials and direct labour for one-pound bags of two of the company's products appear below: Direct materials Direct labour (0.10 hours per bag) Soylent Red Coffee $8.40 $0.60 Soylent Green Coffee $6.40 $0.60 Soylent'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 prepared the following analysis of the year's expected manufacturing overhead costs, as shown in the following table: Activity cost pool Activity measure Expected activity for the Expected cost for the year year Purchasing Purchase orders 6,000 orders $1,200,000 Materials handling Number of setups 5,500 setups $2,240.000 Quality control Number of batches 2,000 batches $320,000 Roasting Roasting hours 240,000 hours $2,400,000 Blending Blending hours 160,000 hours $2,000,000 Packaging Packaging hours 42,000 hours $840,000 Total factory overhead $9,000,000 Data regarding expected production are presented below: Soylent Red Coffee Soylent Green Coffee Expected sales 140,000 pounds 3,000 pounds Data regarding expected activities are presented below: Batches Setups Purchase order size Roasting time per 200 pounds Blending time per 200 pounds Packaging time per 200 pounds Soylent Red Coffee 20 batches 60 setups 10 orders 1,400 hours 700 hours 140 hours Soylent Green Coffee 8 batches 24 setups 8 orders 30 hours 15 hours 3 hours a. Determine the cost of a unit of coffee (Red and Green) using the traditional overhead allocation method. A unit of coffee is a one-pound bag. The unit cost will include direct materials, direct labour, and factory overhead (as determined using the predetermined overhead rate). b. Determine the cost of a unit of coffee (Red and Green) using ABC. As with the traditional method, you will need to show direct materials, direct labour and manufacturing overhead (as determined using ABC). c. Link the numbers to Parts 1 and 2 whenever possible. Show a side-by-side comparison of unit product costs calculated under each method (show the unit product cost of each type of coffee using both traditional and ABC costing). Unit product costs include direct materials, direct labour and manufacturing overhead costs on a per unit basis. Furthermore, determine the changes in the profit margins for each bag of coffee under both methods (the sales price mark-up % is given). How much was the company losing per bag of the Red and Green under the Traditional Method? d. Draw your conclusion