Problem: Volume-Based Costing Versus ABC Coffee MX, Inc. (CMX) processes and distributes a variety of coffee. CMX buys coffee beans from Mexico and roasts, blends, and packages them for resale. Currently the firm offers 5 coffees to gourmet shops in one-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred in the predominantly automated roasting and packaging process. CMX prices its coffee at full product cost, including allocated overhead, plus a markup of 40 percent. Data for the current budget include factory overhead of $4,000,000, which has been allocated by its current costing system on the basis of each product's direct labor cost. The budgeted direct labor cost for the current year totals $800,000. The firm budgeted $8,000,000 for purchases and use of direct materials (mostly coffee beans). Data The budgeted direct costs for one-pound bags of two of the company's products are as follows: Chiapas Veracruz Direct Materials $5.20 $4.20 Direct Labor 0.40 0.40 Normal mark-up percentage = 40% over full cost budgeted overhead cost information for the current year: Cost Driver Purchase orders Setups Budgeted Driver Consumption 1,200 1,800 700 96,100 33,600 26,000 Activity Purchasing Materials handling Quality control Roasting Blending Packaging TOTAL factory overhead cost Batches Budgeted Cost $879,000 $1,120,000 $444,000 $961,000 $336,000 $260,000 $4.000.000 Roasting-hours Blending-hours Packaging-hours TOTAL factory overhead cost $4.000.000 Direct Labor Budget Direct materials budget $800,000 $8,000,000 Data regarding the current year's production of two company's products, Chiapas and Veracruz, follow. There is no beginning or ending direct materials inventory for either of these coffees. Budgeted Sales (pounds) Batch size (pounds) Setups (batch) Purchase order size (pounds) Roasting time (hours per 100 lbs.) Blending time (hours per 100 lbs.) Packaging time (hours per 100 lbs.) Chiapas 120,000 10,000 3 20,000 1.00 0.50 Veracruz 3,000 1,000 3 1,000 1.00 0.50 0.10 0.10 Required 1. Using CMX's current product costing system: a. Determine the company's predetermined overhead rate b. Determine the full product costs and selling prices of one pound of Chiapas and one pound of Veracruz. 2. Using an ABC approach, develop a new product cost for one pound of Chiapas coffee and one pound of Veracruz coffee. Allocate all overhead costs to the 120,000 pounds of Chiapas and the 3,000 pounds of Veracruz. Compare the results with those in requirement 1. 2. Using an ABC approach, develop a new product cost for one pound of Chiapas coffee and one pound of Veracruz coffee. Allocate all overhead costs to the 120,000 pounds of Chiapas and the 3,000 pounds of Veracruz. Compare the results with those in requirement 1. 3. What are the implications of the ABC method with respect to CMX pricing and product-mix strategies? Solution 1.- a) (Volume based costing) Predetermined overhead rate using direct-labor Cost driver: Predetermined factory OH rate = estimated factory OH amount for the year estimated level of cost driver for the year Budgeted factory OH Budgeted DL cost b) Product costs and selling prices Chiapas Veracruz Direct Costs: Direct Materials Direct Labor Total Direct Costs $0.00 $0.00 Predetermined factory OH rate = Indirect Costs: Factory Overhead b) TOTAL Costs Markup b) Selling Price $0.00 $0.00 $0.00 $0.00 2 Cost-driver rates: PFOHR Cost per Unit Cost Driver Purchase orders Setups Activity Purchasing Materials handling Quality control Roasting Blending Packaging Batches Budgeted Activity 1,200 1,800 700 96,100 33,600 26,000 Budgeted Cost $879,000 $1,120,000 $444,000 $961,000 $336,000 $260,000 Roasting-hours Blending-hours Packaging-hours b) Cost per unit Activity Cost Driver units 120,000 pound Budgeted Sales (pounds) Batch size (pounds) Setups (batch) Purchase order size (pounds) Roasting time (hours per 100 lbs.) Blending time (hours per 100 lbs.) Packaging time (hours per 100 lbs.) Total indirect cost Chipas 120,000 10,000 3 20,000 1.00 0.50 0.10 Quality control Materials handling Purchasing Roasting Blending Packaging Batches Setups Purchase orders Roasting-hours Blending-hours Packaging-hours $0 $0.00 Cost per Activity Cost Driver unit units 3,000 pound Budgeted Sales (pounds) Batch size (pounds) Setups (batch) Purchase order size (pounds) Roasting time (hours per 100 lbs.) Blending time (hours per 100 lbs.) Packaging time (hours per 100 lbs.) Total indirect cost Veracruz 3,000 1,000 3 1,000 1.00 0.50 Quality control Materials handling Purchasing Roasting Blending Packaging Batches Setups Purchase orders Roasting-hours Blending-hours Packaging-hours 0.10 $0 $0.00 a) The budgeted unit costs per pound are: Chiapas Veracruz $0.00 $0.00 Per Unit Direct Costs: Direct Materials Direct Labor TOTAL Direct Costs Indirect Costs: Purchasing Materials handling Quality control Roasting Blending Packaging TOTAL Indirect Costs TOTAL Costs Markup Selling Price $0.00 $0.00 $0.00 $0.00 #VALOR! #VALOR! c) Comparative cost numbers: Chiapas Veracruz Requirement 1 (Volume based costing) Selling Price Requirement 2 (ABC) Selling Price 3 What are the implications of the activity-based costing method with respect to CMX's pricing and product mix strategies