Coffee Bean Inc. (CBI) Coffee Bean, Inc. (CBI) processes and distributes a variety of coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently the firm offers 15 coffees to gourmet shops in one-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred in the predominantly automated roasting and packaging process. The company uses relatively little direct labor. Some of the coffees are very popular and sell in large volumes; a few of the newer brands have very low volumes. CBI prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If its prices for certain coffees are significantly higher than the market, CBI lowers its prices. The company competes primarily on the quality of its products, but customers are price conscious as well. Data for the current budget include factory overhead of $3,000,000, which has been allocated by its current costing system on the basis of each products direct labor cost. The budgeted direct labor cost for the current year totals $600,000. The firm budgeted $6,000,000 for purchases and use of direct materials (mostly coffee beans). The budgeted direct costs for one-pound bags of two of the companys many products are as follows: Mona Loa Malaysian

Direct Materials $4.20 $3.20

Direct Labor (dollars) $0.30 $0.30

Direct Labor (hours) 0.30 0.30

CBIs controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. The company calculates a predetermined overhead rate using direct labour cost as the single cost driver. Normal sales mark-up percentage is 30% of full cost. She has developed this analysis of the current years budgeted factory overhead costs:

Activity Cost Driver Budgeted DriverConsumption Budgeted Cost

Purchasing Purchase orders 1,158 $579,000

Materials handling Setups 1,800 $720,000

Quality control Batches 720 $144,000

Roasting Roasting-hours 96,100 $961,000

Blending Blending-hours 33,600 $336,000

Packaging packaging-hours 26,000 $260,000

Total factory overhead cost $3,000,000

Direct Labor Budget $600,000

Direct materials budget $6,000,000

Data regarding the current year's production of just two of the company's products, Mona Loa and Malaysian, follow. There is no beginning or ending direct materials inventory for either of these coffees.

Mona Loa Malaysian

Budgeted Sales (pounds) 100,000 2,000

Batch size (pounds) 10,000 500

Setups (batch) 3 3

Purchase order size (pounds) 25,000 500

Roasting time (hours per 100 lbs.) 1.00 1.00

Blending time (hours per 100 lbs.) 0.50 0.50

Packaging time (hours per 100 lbs.) 0.10 0.10

Mona is wondering what the difference in full product costs and selling prices for one pound of Mona Loa coffee and one pound of Malaysian coffee under the current costing approach is compared to using an ABC approach. Allocate all overhead costs to the 100,000 pounds of Mona Loa and the 2,000 pounds of Malaysian. She would also like to know what are the implications of the ABC system with respect to CBIs product pricing?

Required

Prepare a report to address Monas questions.