Problem 6-1 ABC Costing

High Mountain Coffee Co. is a processor and distributor of different blends of quality coffee. The company buys beans from around the world and roasts, blends and packages them for resale. There are presently 15 different flavors which are sold to gourmet shops in one pound bags. The major cost is raw materials; however, there is substantial amount of manufacturing overhead in the product. This relates to the high level of automation in the roasting and packing. The company uses very little direct labor.

Some of the flavors are very popular and sell in large volumes while a few newer blends have very low volumes. High Mountain prices its coffee at full product cost including allocated overhead plus a markup of 30%. High Mountain competes with comparable qualities but customers are cost conscience.

Data for the 2011 budget includes manufacturing overhead of $3,000,000; direct labor of $600,000, and raw materials of $6,000,000. Total plant production is estimated to be 3,000,000 pounds of coffee.

The expected prime costs for one pound bags of the two following products are as follows:

Kayakers Brundage

Delights Blended

Direct material $3.20 $4.20

Direct labor .30 .30

High Mountain has also developed the following budgeted manufacturing overhead information for 2011.

Budgeted Budgeted

Activity Cost Driver Activity Cost

Purchasing Purchase orders 1,158 $579,000

Material 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 Packages 260,000 260,000

Total manufacturing overhead $3,000,000

Data regarding the 2011 production of Kayakers and Brundage 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.

Kayakers Brundage

Budgeted sale 2,000 lbs 100,000 lbs

Batch size 500 lbs 10,000 lbs

Setup 3 5

Purchase order size 500 lbs 25,000 lbs

Roasting time 1 hr. per 100 lbs. 1 hr. per 100 lbs

Blending time .5 hr. per 100 lbs .5 hr. per 100 lbs

Packaging 1 lb. per package 1 lb. per package

Required:

Calculate the overhead allocation rate for each blend using direct labor dollars as the driver.

Calculate the overhead allocation rate for each blend assuming number of pounds is the driver.

Calculate the overhead allocation rate for each blend using the ABC approach.