QUESTION 3 (25 marks) Biashara (Pty) Ltd is a producer of high grade coffee roasts. The company buys coffee beans from Ethiopia (Buna) and Kenya (Kahawa). The coffee beans are then roasted, blended and packaged in one kilogram bags for sale to specialist coffee houses around the world. The major raw material in the coffee blends is the beans and the company's automated roasting, blending and packaging processes have substantial overheads. Since the company is highly automated it uses very little direct labour. One kilogram of coffee beans yields one kilogram of roasted and blended coffee. The budget for the coming year includes fixed production overhead costs of R3 300 000. Production overheads are applied using direct labour hours at the moment. The expected direct labour cost is R2 500 000 and the total budgeted direct labour hours are 18 334 hours. The above-mentioned labour costs are considered a variable cost. The Buna coffee beans cost R25 per kilogram while the Kahawa coffee beans cost R22 per kilogram. Each kilogram of roasted and blended coffee requires six minutes of labour. Packaging is R5 per kilogram of the Buna roast and it is 209% cheaper for the Kahawa roast. Mr Tsi Binkie, the sales director, has just returned from an executive course at the Johannesburg Business School and has learnt that activity-based costing is more accurate than applying overheads using direct labour hours. He thinks this should be investigated. The following fixed overhead cost information was compiled by a costing analyst: Cost Pool Cost Cost driver Ordering R330 000 Purchase Orders Material handling R655 000 Number of set-ups Roasting and blending R1 545 000 Roasting and blending hours Packaging R770 000 Packaging Hours R3 300 000 Buna Kahawa Planned production and sales 80 000 kg 30 000 kg Number of setups 32 setups 30 setups Purchase order size 20 000kg per 5 000 kg per order order Roasting and blending hours 15 000 hours 10 000 hours Packaging time 2 400 hours 900 hours