World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends and packages them for resale. WGCC currently has 15 different coffees, which it offers to gourmet shops in 1-kilogram bags. The major cost lies in raw materials, but there is also a substantial amount of manufacturing overhead in the automated roasting and packing processes. The company uses relatively little direct labour. Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 per cent. If this method leads to prices that are significantly higher than market price, the price is adjusted downwards. The company competes primarily on the quality of its products, but customers are also price conscious. Data for next year's budget include manufacturing overhead of $3 000 000, which has been allocated on the basis of each product's direct labour cost. The budgeted direct labour cost for next year totals $600 000. Based on the sales budget and raw material budget, purchases and use of raw materials (mostly coffee beans) will total $6 000 000. The expected prime costs for 1-kilogram bags of two of the company's products are as follows: Kona Malaysian Direct Material $2.60 $2.80 Direct Labour $0.80 $0.90 WGCC's controller leaves the traditional product costing system may be providing misleading cost information. She has developed and annular analysis of the budgeted manufacturing overhead cost for next year as follows Quantity of Budgeted Activity Activity Driver activity driver cost Purchasing Purchase Orders 1044 $522,000 Material handling Setups 1540 $1,694,000 Quality control Batches 770 $154,000 Roasting Roasting hours 83600 $836,000 Blending Blending hours 41800 $418,000 Packaging Packaging hours 279001 $558,000 Data for next year's production of the Kona and Malaysian coffee are shown in the following table. There will be no more material inventory for either of these products at the beginning of the next year. Kona Malaysian Budgeted sales (kg) 2000 100000 Batch size (kg) 500 10000 Setups (per batch) 9 10 Purchase order size (kg) 500 25000 Roasting time per 100 kg) in Hour 1.5 1.5 Blending time per 100 kg) in Minute 45 45 Packaging time per 100 kg) in Hour 0.2 0.2 Required 1- using WG Seas current traditional product costing system: a) determine the company's predetermined overhead rate using direct labour cost as the single customer. b) determine the product cost and selling prices of 1 kg of Kona Coffee and 1 kg of Malaysian coffee. 2- Develop new product cost using activity-based costing for 1kg of Kona Coffee and 1kg of Malaysian coffee. 3- (a) Compare the cost of the products calculated in requirement 1 and 2. Provide an explanation as to why the product cost using the traditional costing system are different from those using the ABC system. b) Make recommendations for pricing of the two products based on your analysis
