French Coffee Limited (FCL) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends and packages them for resale. FCL currently has 10 different coffees that it offers to gourmet shops in one-kilogram bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantly automated roasting and packing process. The company uses relatively little direct labour. Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. FCL prices its coffee at full product cost, including allocated overhead, plus a mark-up of 25%. If prices for certain coffees are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price conscious. Data for the 2020 budget include production overhead of $1,800,000, which has been allocated on the basis of each product's direct-labour cost. The budgeted direct-labour cost for 2020 totals $600,000. The expected prime costs for one-kilogram bags of two of the company's products are as follows: Hawaiian Kenyan Direct material $20 $25 Direct labour $10 $15 FCL's controller believes the traditional costing system may be providing misleading cost information. She has developed an analysis of the 2020 budgeted production overhead costs shown in the following: Activity Cost Driver Purchasing Purchase orders Material handling Set-ups Roasting Roasting hours Blending Blending hours Packaging Packaging hours Total production overhead cost Activity Level 4,000 2,200 20,000 80,000 40,000 Budgeted costs $460.000 440,000 260,000 240,000 400,000 $1.800.000 Data regarding the 2020 production of Hawanan and Kenyan coffee are shown in the following table. There will be no raw-material inventory for either of these coffees at the beginning of the year. Hawaiian Kenyan Budgeted sales 20,000 kg 40,000 kg Set-ups 800 1,400 Purchase order 1,000 3,000 Roasting time 5,000 hours 15,000 hours Blending time 45,000 hours 35,000 hours Packaging time 20,000 hours 20,000 hours 2 2 REQUIRED: (a) Using FCL's current traditional costing system, determine the predetermined overhead rate using direct-labour cost as the single cost driver and determine the production cost and selling prices of one kg of Hawaiian coffee and one kg of Kenyan coffee. (5 marks) (b) Using an activity-based costing system, determine the production cost and selling prices of one kg of Hawaiian coffee and one kg of Kenyan coffee. (15 marks) (c) Explain the difference in your answers to (a) and (b) and the potential implications for decision making in FCL