Problem 2 20 points The Global Gourmet Coffee Company (GGCC) is a distributor and processor of different blends of coffee. GGCC currently has 12 different coffees that it offers to gourmet shops in one- pound bags. The major cost is raw materials. There is also a substantial amount of manufacturing overhead in the predominantly automated roasting and packing processes The company uses relatively little direct labor. GSCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. The company competes primarily on the quality of its products, but customers are price-conscious as well. Data for the 2018 budget include manufacturing overhead of $12,000,000, which is allocated based on each product's direct-labor cost. The budgeted direct-labor cost for 2018 totals $1,200,000. Based on the sales budget and raw material budget, purchases and use of raw materials (coffee beans) will total $5,800,000. The expected prime costs for one-pound bags of two of the company's products are as follows: Jamaican Columbian Direct material $2.90 $3.90 Direct labor .40 .40 An analysis of the 2018 budgeted manufacturing-overhead costs is shown in the following chart. Activity Cost driver Budgeted Activity Level Budgeted Cost Purchasing Purchase Orders 2,316 $2,316,000 Material Handling Setups 3,600 2,880,000 Quality Control Batches 1,4 576,000 Roasting Roasting Hours 192,200 3,844,000 Blending Blending Hours 67,200 1,344,000 Packaging Packaging Hours 52,000 1,040,000 Total $12,000,000 Production data for Jamaican and Colombian coffees in 2018 are as follows: Jamaican Columbian Budgeted Sales 2,000 lb 100,000 lb Batch Size 500 lb 20,000 lb Setups 3 per batch 3 per batch Purchase Order Size 500 lb 50,000 lb Roasting Time 1 hr/200 lb 1 hr/200 lb Blending Time .5 hr/200 lb.5 hr/200 lb Packaging Time .1 hr/200 lb .1 hr/200 lb This problem continues on the next page. Required: 1. Using GGCC'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 Jamaican coffee and one pound of Colombian coffee. 2. Develop a new product cost, using an activity-based costing approach, for one pound of Jamaican coffee and one pound of Colombian coffee. 3. Fully discuss the implications of the activity-based costing system with respect to: a. The use of direct labor as the sole basis for applying overhead to products? b. The use of the existing product-costing system as the basis for pricing
