Volume-Based Costing versus ABC Coffee Bean Inc. (CBI) processes and distributes a variety of coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently the firm offers 15 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 packing process. The company uses relatively little direct labor Some of the coffees are very popular and sell in large volumes; a few of the newer brands have very low volumes. CBI prices its coffee at full product cost, including allocated overhead, plus a markup of 30%. If its prices for certain coffees are significantly higher than the market, CBI lowers its prices. The company competes primarily on the quality of its products, but customers are price conscious as well. Data for the current budget include factory overhead of $3,000,000, 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 $600,000. The firm budgeted $6,000,000 for purchases and use of direct materials (mostly coffee beans). The budgeted direct costs for one-pound bags of two of the company's products are as follows: Mona Loa Malaysian Direct materials $4.20 $3.20 0.30 Direct labor 0.30 CBI's controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the current year's budgeted factory overhead costs: Budgeted Activity Budgeted Cost Activity Cost Driver 1,158 1,800 720 96,100 33,600 26,000 Purchase orders Setups Batches 579,000 720,000 144,000 961,000 336,000 Purchasing Materials handling Quality control Roasting Blending Packaging Total factory overhead cost Roasting-hours Blending-hours Packaging-hours 260,000 $3,000,000 Data regarding the current year's production of two of its lines, Mona Loa and Malaysian, follow. There is no beginning or ending direct materials inventory for either of these coffees. Mona Loa Malaysian Budgeted sales Batch size 100,000 pounds 10,000 pounds 3 per batch 25,000 pounds 1 hour per 100 pounds 0.5 hour per 100 pounds 0.1 hour per 100 pounds 2,000 pounds 500 pounds 3 per batch 500 pounds 1 hour per 100 pounds 0.5 hour per 100 pounds 0.1 hour per 100 pounds Setups Purchase order size Roasting time Blending time Packaging time Required 1. Using Coffee Bean Inc.'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 Mona Loa coffee and one pound of Malaysian coffee. 2. Using an activity-based costing approach, develop a new product cost for one pound of Mona Loa coffee and one pound of Malaysian coffee. Allocate all overhead costs to the 100,000 pounds of Mona Loa and the 2,000 pounds of Malaysian. Compare the results with those in requirement 1 3. What are the implications of the activity-based costing system with respect to CBl's pricing and product mix strategies? How does ABC add to CBI's competitive advantage? (CMA Adapted)