Question
CASE LO4-2, LO4-3, LO4-4 Coffee Bean, Inc. (CBI), is a processor and distributor of a variety of blends of coffee. The company buys coffee beans
CASE LO4-2, LO4-3, LO4-4 Coffee Bean, Inc. (CBI), is a processor and distributor of a variety of blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. CBI offers a large variety of 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 pro- cesses require a substantial amount of manufacturing overhead. The company uses relatively little direct labor. Some of CBI's coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. For the coming year, CBI's budget includes estimated manufacturing overhead cost of $3,000,000. CBI 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 company's coffee products appear below. Mona Loa Malaysian Direct materials . . . . . . . . . . . . . . . . . . . . . . $4.20 $3.20 Direct labor (0.025 hours per bag) . . . . . $0.30 $0.30 CBI'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 has prepared an analysis of the year's expected manufacturing overhead costs, as shown in the following table: Final PDF to printer
181Activity-Based Costing Data regarding the expected production of Mona Loa and Malaysian coffee are presented below. There will be no raw materials inventory for either of these coffees at the beginning of the year. Activity Cost Pool Activity Measure Expected Activity for the Year Expected Cost for the Year Purchasing . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase orders 1,710 orders $ 513,000 Material handling . . . . . . . . . . . . . . . . . . . . . Number of setups 1,800 setups 720,000 Quality control. . . . . . . . . . . . . . . . . . . . . . . . Number of batches 600 batches 144,000 Roasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Roasting hours 96,100 roasting hours 961,000 Blending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Blending hours 33,500 blending hours 402,000 Packaging . . . . . . . . . . . . . . . . . . . . . . . . . . . Packaging hours 26,000 packaging hours 260,000 Total manufacturing overhead cost . . . . . . $3,000,000 *Adapted from Harold P. Roth and Imogene Posey, "Management Accounting Case Study: Carry All Company," Management Accounting Campus Report, Institute of Management Accountants, Fall 1991, p. 9. Used by permission from the IMA, Montvale, NJ, USA, www.imanet.org. Mona Loa Malaysian Expected sales . . . . . . . . . . . . . . . . . . . . . . 100,000 pounds 2,000 pounds Batch size. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 pounds 500 pounds Setups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 per batch 3 per batch Purchase order size . . . . . . . . . . . . . . . . . . 20,000 pounds 500 pounds Roasting time per 100 pounds. . . . . . . . . 1.0 roasting hours 1.0 roasting hours Blending time per 100 pounds . . . . . . . . 0.5 blending hours 0.5 blending hours Packaging time per 100 pounds . . . . . . . 0.1 packaging hours 0.1 packaging hours Required: 1. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, do the following: a. Determine the predetermined overhead rate that will be used during the year. b. Determine the unit product cost of one pound of the Mona Loa coffee and one pound of the Malaysian coffee. 2. Using activity-based costing as the basis for assigning manufacturing overhead cost to products, do the following: a. Determine the total amount of manufacturing overhead cost assigned to the Mona Loa coffee and to the Malaysian coffee for the year. b. Using the data developed in part (2a) above, compute the amount of manufacturing overhead cost per pound of the Mona Loa coffee and the Malaysian coffee. Round all computations to the nearest whole cent. c. Determine the unit product cost of one pound of the Mona Loa coffee and one pound of the Malaysian coffee.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started