Question
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
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 has 15 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead 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, 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%. The company competes primarily on quality, but customers are somewhat price-conscious as well.
Data for the 2012 budget include manufacturing overhead of $3,000,000, which has traditionally been allocated to products based on budgeted direct labor cost. The budget for direct labor cost for 2012 is $600,000. Budgeted direct raw material (mostly coffee beans) costs total $6,000,000.
The expected material and labor costs for one-pound for two of the company's products are as follows:
Kona
Malaysian
Direct material
$3.20
$4.20
Direct labor
$0.30
$0.30
WGCC's controller believes that the direct-labor based product costing system is providing misleading cost information. She has developed an analysis of 2012's manufacturing costs as below:
Activity
Cost driver
Budgeted Activity
Budgeted 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
Packaging hours
26,000
260,000
Total manufacturing overhead cost
$3,000,000
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