Java Source, Inc. (JSI) 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. JSI 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 JSI's coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. JSI 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, JSI's budget includes estimated manufacturing overhead cost of $2,200,000. JSI assigns manufacturing overhead to products on the basis of DL hours. The expected direct labor cost totals $600,000, which represents 50,000 hours of DL 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. Kenya Dark $4.50 $0.24 Viet Select $2.90 $0.24 Direct materials Direct labor (0.02 hours per bag) I JSI'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 Purchasing Material handling Quality control Roasting Blending Packaging Total manufacturing overhead cost Activity Measure Purchase orders Number of setups Number of batches Roasting hours Blending hours Packaging hours Expeted Activity for the Year 2,000 orders 1,000 setups 500 batches 95,000 roasting hrs 32,000 blending hrs 24,000 packaging hrs 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 Kenya Dark and Viet Select coffee are presented below. Expected sales Batch size Setups Purchase order size Rosting time per 100 pounds Blending time per 100 pounds Packaging time per 100 pounds Kenya Dark Viet Select 80,000 pounds 4,000 pounds 5,000 pounds 500 pounds 2 per batch 2 per batch 20,000 pounds 500 pounds 1.5 roasting hours 1.5 roasting hours 0.5 blending hours 0.5 blending hours 0.3 packaging hours 0.3 packaging hours Required: 1. Using DL hours as the base for assigning manufactuiring overhead cost to products: a. Determine the predetermined overhead rate that will be used during the year. b. Determine the unit product cost of one pound of each of the two coffees. 2. Using activity based costing as the basis for assigning manufacturing overhead cost to products: a. Determine the total amount of manufacturing overhead cost assigned to each of the coffees for the year. b. Using the data developed in (2a), compute the amount of manufacturing overhead cost per pound of each of the two coffees. c. Determine the unit product cost of one pound of each of the two coffees
