Case Study

Blueberry Co., 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. Blueberry 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 processes require a substantial amount of manufacturing overhead. The company uses relatively little direct labor. Some of Blueberry's coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. Blueberry prices its coffees at manufacturing cost plus a markup of 25 %, with some adjustments made to keep the company's prices competitive. For the coming year, Blueberry's budget includes estimated manufacturing overhead cost of $2,200,000. Blueberry 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. Based on the sales budget and expected raw materials costs, the company will purchase and use $5,000,000 of raw materials (mostly coffee beans) during the year. The expected costs for direct materials and direct labor for one-pound bags of two of the company's coffee products appear below. Direct materials Direct labor (0.02 hours per bag) Organic Guatemalan $4.50 $0.24 Special Blend $2.90 $0.24 Blueberry'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: Activity Cost Pool Activity Measures Purchasing Material handling Quality control Roasting Blending Packaging Total manufacturing overhead cost Purchase orders Number of setups Number of batches Roasting hours Blending hours Packaging hours Expected Activity for the Year 2,000 orders 1,000 setups 500 batches 95,000 roasting hours 32,000 blending hours 24,000 packaging hours Expected Cost for the Year $560,000 193,000 90,000 1,045,000 192,000 120,000 $2.200,000 Data regarding the expected production of Organic Guatemalan and Special Blend coffees are presented below: per Expected sales Batch size Setups Purchase order size Roasting time per 100 pounds Blending time per 100 pounds Packaging time per 100 pounds Organic Guatemalan 80,000 pounds 5,000 pounds 2 batch 20,000 pounds 1.5 roasting hours 0.5 blending hours 0.3 packaging hours Special Blend 4,000 pounds 500 pounds 2 per batch 500 pounds 1.5 roasting hours 0.5 blending hours 0.3 packaging hours Questions: 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 Organic Guatemalan coffee and one pound of the Special Blend 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 Organic Guatemalan coffee and to the Special Blend coffee for the year. b. Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of the Organic Guatemalan coffee and the Special Blend coffee. Round all computations to the nearest whole cent. c. Determine the unit product cost of one pound of the Organic Guatemalan coffee and one pound of the Special Blend coffee. 3. Write a brief memo to the president of Blueberry explaining what you have found in (1) and (2) above and discussing the implications to the company of using direct labor as the base for assigning manufacturing overhead cost to products