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 1-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred in the predominantly automated roasting and packing 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%. 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 $2,400,000, which has been allocated on the basis of each product's direct labor cost. The budgeted direct labor cost for the current year totals $594,000. The firm budgeted $5,400,000 for purchase and use of direct materials (mostly coffee beans).

The budgeted direct costs for 1-pound bags of two of the company's many products are as follows:

Mona LoaMalaysianDirect materials$4.20$3.20Direct labor0.300.30

CBI's controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the current year's budgeted factory overhead costs:

ActivityCost DriverBudgeted ActivityBudgeted CostPurchasingPurchase orders1,098$573,000Materials handlingSetups1,740714,000Quality controlBatches660138,000RoastingRoasting hours95,500955,000BlendingBlending hours33,000330,000PackagingPackaging hours25,400254,000Total factory overhead cost$2,964,000

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

Mona LoaMalaysianBudgeted sales100,600 pounds1,940 poundsBatch size9,400 pounds440 poundsSetups3 per batch3 per batchPurchase order size24,400 pounds440 poundsRoasting time1 hour per 100 pounds1 hour per 100 poundsBlending time0.5 hour per 100 pounds0.5 hour per 100 poundsPackaging time0.1 hour per 100 pounds0.1 hour per 100 pounds

Required:

1. Using Coffee Bean Inc.'s current product costing system,

a. Determine the company's predetermined overhead rate using direct labor cost as the single cost driver.

b. Determine the full product costs and selling prices of one pound of Mona Loa coffee and one pound of Malaysian coffee.

2. Using an activity-based costing approach, develop a new product cost for 1 pound of Mona Loa coffee and 1 pound of Malaysian coffee. Allocate all overhead costs to the 100,600 pounds of Mona Loa and the 1,940 pounds of Malaysian.